CBFV 10-Q Quarterly Report Sept. 30, 2020 | Alphaminr
CB Financial Services, Inc.
ALPHAMINR

CBFV 10-Q Quarter ended Sept. 30, 2020

Balance Sheet
Cash Flow
Income Statement
Debt
CB FINANCIAL SERVICES, INC.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-36706
CB FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 51-0534721
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
100 N. Market Street , Carmichaels , PA
15320
(Address of principal executive offices) (Zip Code)
( 724 ) 966-5041
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Common stock, par value $0.4167 per share CBFV The Nasdaq Stock Market, LLC
(Title of each class) (Trading symbol) (Name of each exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Non-accelerated filer ☐
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of November 9, 2020, the number of shares outstanding of the Registrant’s Common Stock was 5,397,892 .


FORM 10-Q
INDEX
Page


PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
(Unaudited) September 30,
2020 		December 31,
2019
(Dollars in thousands, except per share and share data)
ASSETS
Cash and Due From Banks:
Interest Bearing $ 102,400 $ 68,798
Non-Interest Bearing 9,769 11,419
Total Cash and Due From Banks 112,169 80,217
Investment Securities:
Available-for-Sale 158,956 197,385
Loans, Net of Allowance for Loan Losses of $ 13,780 and $ 9,867 at September 30, 2020 and December 31, 2019, Respectively
1,037,105 942,629
Premises and Equipment, Net
20,439 22,282
Bank-Owned Life Insurance
24,639 24,222
Goodwill
9,732 28,425
Intangible Assets, Net
8,931 10,527
Accrued Interest and Other Assets
20,905 15,850
TOTAL ASSETS
$ 1,392,876 $ 1,321,537
LIABILITIES
Deposits:
Non-Interest Bearing Demand Deposits $ 335,287 $ 267,152
NOW Accounts 245,850 232,099
Money Market Accounts 188,958 182,428
Savings Accounts 232,691 216,924
Time Deposits 196,250 219,756
Total Deposits 1,199,036 1,118,359
Short-Term Borrowings
42,061 30,571
Other Borrowings
11,000 14,000
Accrued Interest and Other Liabilities
7,480 7,510
TOTAL LIABILITIES
1,259,577 1,170,440
STOCKHOLDERS' EQUITY
Preferred Stock, No Par Value; 5,000,000 Shares Authorized
— —
Common Stock, $ 0.4167 Par Value; 35,000,000 Shares Authorized, 5,680,993 Shares Issued and 5,398,712 and 5,463,828 Shares Outstanding at September 30, 2020 and December 31, 2019, Respectively
2,367 2,367
Capital Surplus
83,338 82,971
Retained Earnings
49,348 66,955
Treasury Stock, at Cost ( 282,281 and 217,165 Shares at September 30, 2020 and December 31, 2019, Respectively)
( 5,825 ) ( 3,842 )
Accumulated Other Comprehensive Income
4,071 2,646
TOTAL STOCKHOLDERS' EQUITY
133,299 151,097
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 1,392,876 $ 1,321,537


The accompanying notes are an integral part of these consolidated financial statements
1
CONSOLIDATED STATEMENT OF (LOSS) INCOME (UNAUDITED)
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2020 2019 2020 2019
(Dollars in thousands, except share and per share data)
INTEREST AND DIVIDEND INCOME
Loans, Including Fees $ 10,709 $ 10,984 $ 32,050 $ 32,090
Investment Securities:
Taxable 753 1,558 2,894 4,317
Tax-Exempt 79 131 291 499
Dividends 19 20 59 60
Other Interest and Dividend Income 96 405 418 1,097
TOTAL INTEREST AND DIVIDEND INCOME 11,656 13,098 35,712 38,063
INTEREST EXPENSE
Deposits 1,150 1,864 4,136 5,407
Short-Term Borrowings 28 47 112 143
Other Borrowings 62 91 194 278
TOTAL INTEREST EXPENSE 1,240 2,002 4,442 5,828
NET INTEREST AND DIVIDEND INCOME 10,416 11,096 31,270 32,235
Provision For Loan Losses 1,200 175 4,000 550
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,216 10,921 27,270 31,685
NONINTEREST INCOME
Service Fees 554 639 1,646 1,849
Insurance Commissions 1,079 985 3,475 3,219
Other Commissions 76 98 374 293
Net Gain on Sales of Loans 435 48 1,003 190
Net Gain (Loss) on Sales of Investment Securities — 3 489 ( 50 )
Change in Fair Value of Marketable Equity Securities ( 59 ) ( 25 ) ( 469 ) 104
Net Gain on Purchased Tax Credits 15 9 46 27
Net (Loss) Gain on Disposal of Fixed Assets ( 65 ) — ( 48 ) 2
Income from Bank-Owned Life Insurance 140 142 417 408
Other (Loss) Income ( 2 ) 67 ( 240 ) 203
TOTAL NONINTEREST INCOME 2,173 1,966 6,693 6,245
NONINTEREST EXPENSE
Salaries and Employee Benefits 5,124 4,628 14,683 14,273
Occupancy 759 597 2,191 2,019
Equipment 220 266 701 847
Data Processing 482 370 1,367 1,158
FDIC Assessment 172 5 493 368
PA Shares Tax 355 226 963 743
Contracted Services 531 312 1,471 945
Legal and Professional Fees 161 117 567 458
Advertising 148 208 486 545
Other Real Estate Owned (Income) ( 12 ) 13 ( 30 ) ( 81 )
Amortization of Intangible Assets 532 531 1,596 1,595
Goodwill Impairment 18,693 — 18,693 —
Writedown of Fixed Assets 884 — 884 —
Other 919 984 2,977 3,064
TOTAL NONINTEREST EXPENSE 28,968 8,257 47,042 25,934
(Loss) Income Before Income Tax (Benefit) Expense ( 17,579 ) 4,630 ( 13,079 ) 11,996
Income Tax (Benefit) Expense ( 184 ) 884 640 2,346
NET (LOSS) INCOME $ ( 17,395 ) $ 3,746 $ ( 13,719 ) $ 9,650
(LOSS) EARNINGS PER SHARE
Basic $ ( 3.22 ) $ 0.69 $ ( 2.54 ) $ 1.78
Diluted ( 3.22 ) 0.69 ( 2.54 ) 1.77
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 5,395,342 5,433,289 5,406,710 5,433,296
Diluted 5,395,342 5,458,723 5,406,710 5,451,705
The accompanying notes are an integral part of these consolidated financial statements
2
CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2020 2019 2020 2019
(Dollars in thousands)
Net (Loss) Income $ ( 17,395 ) $ 3,746 $ ( 13,719 ) $ 9,650
Other Comprehensive (Loss) Income:
Change in Unrealized (Loss) Gain on Investment Securities Available-for-Sale
( 653 ) 121 2,292 5,652
Income Tax Effect 137 ( 47 ) ( 481 ) ( 1,209 )
Reclassification Adjustment for (Gain) Loss on Sale of Investment Securities Included in Net (Loss) Income (1)
— ( 3 ) ( 489 ) 50
Income Tax Effect (1)
— 1 103 ( 11 )
Other Comprehensive (Loss) Income, Net of Income Tax Expense (Benefit)
( 516 ) 72 1,425 4,482
Total Comprehensive (Loss) Income $ ( 17,911 ) $ 3,818 $ ( 12,294 ) $ 14,132
(1) The gross amount of gain (loss) on sales of investment securities is reported as Net Gain (Loss) on Sales of Investments Securities on the Consolidated Statement of (Loss) Income. The income tax effect (benefit) is included in Income Tax Expense on the Consolidated Statement of (Loss) Income.
The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)
Shares Issued
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other
Comprehensive Income (Loss)
Total Stockholders' Equity
(Dollars in thousands, except share and per share data)
June 30, 2020 5,680,993 $ 2,367 $ 83,327 $ 68,039 $ ( 5,928 ) $ 4,587 $ 152,392
Comprehensive Loss:
Net Loss — — — ( 17,395 ) — — ( 17,395 )
Other Comprehensive Loss — — — — — ( 516 ) ( 516 )
Restricted Stock Awards Granted
— — ( 103 ) — 103 — —
Stock-Based Compensation Expense
— — 114 — — — 114
Dividends Paid ($ 0.24 Per Share)
— — — ( 1,296 ) — — ( 1,296 )
September 30, 2020 5,680,993 $ 2,367 $ 83,338 $ 49,348 $ ( 5,825 ) $ 4,071 $ 133,299
Shares Issued Common Stock Capital Surplus Retained Earnings Treasury Stock Accumulated Other
Comprehensive Income 		Total Stockholders' Equity
(Dollars in thousands, except share and per share data)
June 30, 2019 5,680,993 $ 2,367 $ 83,380 $ 61,140 $ ( 4,350 ) $ 2,970 $ 145,507
Comprehensive Income:
Net Income — — — 3,746 — — 3,746
Other Comprehensive Income — — — — — 72 72
Stock-Based Compensation Expense — — 77 — — — 77
Dividends Paid ($ 0.24 Per Share)
— — — ( 1,304 ) — — ( 1,304 )
September 30, 2019 5,680,993 $ 2,367 $ 83,457 $ 63,582 $ ( 4,350 ) $ 3,042 $ 148,098

The accompanying notes are an integral part of these consolidated financial statements
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Shares Issued
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other
Comprehensive Income
Total Stockholders' Equity
(Dollars in thousands, except share and per share data)
December 31, 2019 5,680,993 $ 2,367 $ 82,971 $ 66,955 $ ( 3,842 ) $ 2,646 $ 151,097
Comprehensive (Loss) Income:
Net Loss — — — ( 13,719 ) — — ( 13,719 )
Other Comprehensive Income
— — — — — 1,425 1,425
Restricted Stock Awards Granted
— — ( 103 ) — 103 — —
Restricted Stock Awards Forfeited — — 96 — ( 96 ) — —
Stock-Based Compensation Expense
— — 370 — — — 370
Exercise of Stock Options
— — 4 — ( 82 ) — ( 78 )
Treasury stock purchased, at cost ( 67,816 shares)
— — — — ( 1,908 ) — ( 1,908 )
Dividends Paid ($ 0.72 Per Share)
— — — ( 3,888 ) — — ( 3,888 )
September 30, 2020 5,680,993 $ 2,367 $ 83,338 $ 49,348 $ ( 5,825 ) $ 4,071 $ 133,299
Shares Issued
Common Stock
Capital Surplus
Retained Earnings
Treasury Stock
Accumulated Other
Comprehensive Income (Loss)
Total Stockholders' Equity
(Dollars in thousands, except share and per share data)
December 31, 2018 5,680,993 $ 2,367 $ 83,225 $ 57,843 $ ( 4,370 ) $ ( 1,440 ) $ 137,625
Comprehensive Income:
Net Income — — — 9,650 — — 9,650
Other Comprehensive Income — — — — — 4,482 4,482
Restricted Stock Awards Forfeited — — 8 — ( 8 ) — —
Restricted Stock Awards Granted — — ( 11 ) — 11 — —
Stock-Based Compensation Expense — — 230 — — — 230
Exercise of Stock Options — — 5 — 17 — 22
Dividends Paid ($ 0.72 Per Share)
— — — ( 3,911 ) — — ( 3,911 )
September 30, 2019 5,680,993 $ 2,367 $ 83,457 $ 63,582 $ ( 4,350 ) $ 3,042 $ 148,098

The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2020 2019
(Dollars in thousands)
OPERATING ACTIVITIES
Net (Loss) Income $ ( 13,719 ) $ 9,650
Αdjustmеnts to Rеconcilе Net (Loss) Income to Net Cash Provided By Operating Activities:
Net Accretion on Investments ( 9 ) ( 145 )
Depreciation and Amortization 2,578 2,730
Provision for Loan Losses 4,000 550
Goodwill impairment 18,693 —
Writedown on Fixed Assets 884 —
Change in Fair Value of Marketable Equity Securities 469 ( 104 )
Net Gain on Purchased Tax Credits ( 46 ) ( 27 )
Income from Bank-Owned Life Insurance ( 417 ) ( 408 )
Proceeds From Mortgage Loans Sold 24,317 7,378
Originations of Mortgage Loans for Sale ( 23,314 ) ( 7,188 )
Net Gain on Sales of Loans ( 1,003 ) ( 190 )
Net (Gain) Loss on Sales of Investment Securities ( 489 ) 50
Net Loss on Sales of Other Real Estate Owned and Repossessed Assets 26 6
Noncash Expense for Stock-Based Compensation 370 230
(Increase) Decrease in Accrued Interest Receivable ( 944 ) 33
Net Loss (Gain) on Disposal of Fixed Assets 48 ( 2 )
(Decrease) Increase in Taxes Payable ( 253 ) 259
Payments on Operating Leases ( 412 ) ( 312 )
(Decrease) Increase in Accrued Interest Payable ( 252 ) 331
Other, Net ( 1,329 ) ( 136 )
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,198 12,705
INVESTING ACTIVITIES
Investment Securities Available for Sale:
Proceeds From Principal Repayments and Maturities 91,219 34,490
Purchases of Debt and Marketable Equity Securities ( 68,851 ) ( 50,185 )
Proceeds from Sales of Securities 17,893 29,460
Net Increase in Loans ( 100,436 ) ( 21,531 )
Purchase of Premises and Equipment ( 184 ) ( 66 )
Proceeds from Disposal of of Premises and Equipment 26 —
Asset Acquisition of a Customer List — ( 900 )
Proceeds From Sales of Other Real Estate Owned and Repossessed Assets 99 1,123
(Increase) Decrease in Restricted Equity Securities ( 305 ) 214
Acquisition of Bank Owned Life Insurance — ( 750 )
NET CASH USED IN INVESTING ACTIVITIES ( 60,539 ) ( 8,145 )
FINANCING ACTIVITIES
Net Increase in Deposits 80,677 39,250
Net Increase (Decrease) in Short-Term Borrowings 11,490 ( 1,861 )
Principal Payments on Other Borrowed Funds ( 3,000 ) ( 3,000 )
Cash Dividends Paid ( 3,888 ) ( 3,911 )
Treasury Stock, Purchases at Cost ( 1,908 ) —
Exercise of Stock Options ( 78 ) 22
NET CASH PROVIDED BY FINANCING ACTIVITIES 83,293 30,500
INCREASE IN CASH AND CASH EQUIVALENTS 31,952 35,060
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 80,217 53,353
CASH AND DUE FROM BANKS AT END OF PERIOD $ 112,169 $ 88,413

The accompanying notes are an integral part of these consolidated financial statements
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CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
Nine Months Ended September 30, 2020 2020 2019
(Dollars in thousands)
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for:
Interest on deposits and borrowings (including interest credited to deposit accounts of $ 4,382 and $ 5,070 , respectively)
$ 4,694 $ 5,497
Income taxes 1,785 2,260
SUPPLEMENTAL NONCASH DISCLOSURE:
Real estate acquired in settlement of loans 115 427
Income tax refund receivable 1,002 —
Loan payoff receivable 5,628 1,644
Right of use asset recognized 329 1,706
Lease liability recognized 329 1,712

The accompanying notes are an integral part of these consolidated financial statements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of CB Financial Services, Inc. (“CB Financial”) and its wholly owned subsidiary, Community Bank (the “Bank”), and the Bank’s wholly-owned subsidiary, Exchange Underwriters, Inc. (“Exchange Underwriters” or “EU”). CB Financial and the Bank are collectively referred to as the “Company”. All intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and in conformity with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading in any material respect. In preparing financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and income and expenses during the reporting period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to determination of the allowance for losses on loans, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, evaluation of securities for other-than-temporary impairment including related cash flow projections, goodwill and intangible assets impairment, and the valuation of deferred tax assets.
In the opinion of management, the accompanying unaudited interim financial statements include all adjustments considered necessary for a fair presentation of the Company’s financial position and results of operations at the dates and for the periods presented. All these adjustments are of a normal, recurring nature, and they are the only adjustments included in the accompanying unaudited interim financial statements. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Interim results are not necessarily indicative of results for a full year.
The Company evaluated subsequent events through the date the consolidated financial statements were filed with the SEC and incorporated into the consolidated financial statements the effect of all material known events determined by Accounting Standards Codification ("ASC") 855, Subsequent Events , to be recognizable events.
Nature of Operations
The Company derives substantially all its income from banking and bank-related services which include interest earnings on commercial, commercial mortgage, residential real estate and consumer loan financing, as well as interest earnings on investment securities and fees generated from deposit services to its customers. The Company provides banking services through its subsidiary, Community Bank, a Pennsylvania-chartered commercial bank. The Bank operates 15 offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania, six offices in Brooke, Marshall, Ohio, Upshur and Wetzel Counties in West Virginia, and one office in Belmont County in Ohio. The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well as a variety of deposit products for individuals and businesses in its market area. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, a full-service, independent insurance agency.
Reclassifications
Certain comparative amounts for the prior year have been reclassified to conform to the current year presentation. Such reclassifications did not affect net (loss) income or stockholders’ equity.
Recent Accounting Standards
In March 2020, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Inter-bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. The elective guidance in the ASU applies to modifications of contract terms that will directly replace, or have the potential to replace, an affected rate with another interest rate index, as well as certain contemporaneous modifications of other contract terms related to the replacement of an affected rate. The ASU notes that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to effect that transition. The optional
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expedient allows companies to account for the modification as if it was not substantial (i.e., do not treat as an extinguishment of debt). The ASU is intended to help stakeholders during the global market-wide reference rate transition period. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. While the LIBOR reform may require extensive changes to the contracts that govern LIBOR based products, as well as our systems and processes, we cannot yet determine whether the Company will be able to use the optional expedient for the changes to contract terms that may be required by LIBOR reform and therefore, the Company cannot yet determine the magnitude of the impact or the overall impact of the new guidance on the Company’s consolidated financial condition or results of operation.
In August 2018, the FASB issued ASU 2018-15 , Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) . ASU 2018-15 was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. This guidance became effective for the Company beginning in the first quarter 2020 and the adoption of this ASU did not have a material impact on the Company's consolidated statement of financial condition or results of operations.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) . ASU 2018-13 modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU were effective for the Company beginning in the first quarter 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented. The adoption of this ASU did not have a material impact on the Company's consolidated statement of financial condition or results of operations.
In January 2017, the FASB issued ASU 2017-04, Intangibles Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . ASU 2017-04 simplifies the accounting for goodwill impairments by eliminating the second step of the goodwill impairment test. Instead, an entity applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. ASU 2017-04 is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted, and is to be applied on a prospective basis. The Company elected to early adopt the provisions of ASU 2017-04 effective October 31, 2019 and the adoption did not have a material impact on the Company's consolidated statement of financial condition or results of operations.
In September 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP; and instead requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available-for-sale debt securities, credit losses should be measured in a manner similar to current GAAP, however this ASU requires that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects companies holding financial assets and net investment in leases that are not accounted for at fair value through net income. The ASU 2016-13 amendments affect loans, debt securities, trade receivables, net investments in leases, off balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 was originally effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Company, resulting in a required implementation date for the Company of January 1, 2023. Early adoption will continue to be permitted. The Company is evaluating the impact of this ASU and expects to recognize a one-time adjustment to the allowance for loan losses upon adoption, but we cannot yet determine the magnitude of the one-time adjustment or the overall impact of the new guidance on the Company’s consolidated financial condition or results of operation.
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Note 2. (Loss) Earnings Per Share
There are no convertible securities which would affect the numerator in calculating basic and diluted (loss) earnings per share; therefore, net (loss) income as presented on the Consolidated Statement of (Loss) Income is used as the numerator.
The following table sets forth the composition of the weighted-average common shares (denominator) used in the basic and diluted earnings per share computation.
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2020 2019 2020 2019
(Dollars in thousands, except share and per share data)
Net (Loss) Income $ ( 17,395 ) $ 3,746 $ ( 13,719 ) $ 9,650
Weighted-Average Basic Common Shares Outstanding
5,395,342 5,433,289 5,406,710 5,433,296
Dilutive Effect of Common Stock Equivalents (Stock Options and Restricted Stock)
— 25,434 — 18,409
Weighted-Average Diluted Common Shares and Common Stock Equivalents Outstanding
5,395,342 5,458,723 5,406,710 5,451,705
(Loss) Earnings Per Share:
Basic
$ ( 3.22 ) $ 0.69 $ ( 2.54 ) $ 1.78
Diluted
( 3.22 ) 0.69 ( 2.54 ) 1.77
The dilutive effect on weighted average diluted common shares outstanding is the result of outstanding stock options and nonvested restricted stock. The following table presents for the periods indicated (a) options to purchase shares of common stock that were outstanding but not included in the computation of earnings per share because the options’ exercise price was greater than the average market price of the common shares for the period, and (b) shares of restricted stock awards that were not included in the computation of diluted earnings per share because the hypothetical repurchase of shares under the treasury stock method exceeded the weighted average nonvested restricted awards, therefore the effects would be anti-dilutive.
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2020 2019 2020 2019
Stock Options 220,271 88,253 220,271 88,253
Restricted Stock 49,130 — 49,130 600
When there is a net loss for the period, the exercise or conversion of any potential shares increases the number of shares in the denominator and results in a lower loss per share. In that situation, the potential shares are antidilutive and not included in the Company's loss per share calculation. Therefore, if there is a net loss, diluted loss per share is the same as basic loss per share.

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Note 3. Investment Securities
The following table presents the amortized cost and fair value of investment securities available-for-sale at the dates indicated:
September 30, 2020
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(Dollars in thousands)
Debt Securities:
U.S. Government Agencies
$ 41,994 $ 16 $ ( 178 ) $ 41,832
Obligations of States and Political Subdivisions
20,761 1,290 — 22,051
Mortgage-Backed Securities - Government-Sponsored Enterprises
88,735 4,049 — 92,784
Total Debt Securities
151,490 5,355 ( 178 ) 156,667
Marketable Equity Securities:
Mutual Funds
1,022
Other
1,267
Total Marketable Equity Securities
2,289
Total Available-for-Sale Securities
$ 158,956
December 31, 2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(Dollars in thousands)
Debt Securities:
U.S. Government Agencies
$ 47,993 $ 227 $ ( 164 ) $ 48,056
Obligations of States and Political Subdivisions
25,026 819 ( 2 ) 25,843
Mortgage-Backed Securities - Government-Sponsored Enterprises
118,282 2,601 ( 107 ) 120,776
Total Debt Securities
191,301 3,647 ( 273 ) 194,675
Marketable Equity Securities:
Mutual Funds
997
Other
1,713
Total Marketable Equity Securities
2,710
Total Available-for-Sale Securities
$ 197,385
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The following tables show the Company’s gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at the dates indicated:
September 30, 2020
Less than 12 months
12 Months or Greater
Total
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
(Dollars in thousands)
U.S. Government Agencies
8 $ 33,815 $ ( 178 ) — $ — $ — 8 $ 33,815 $ ( 178 )
Total 8 $ 33,815 $ ( 178 ) — $ — $ — 8 $ 33,815 $ ( 178 )
December 31, 2019
Less than 12 months
12 Months or Greater
Total
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
Number
of
Securities
Fair
Value
Gross
Unrealized
Losses
(Dollars in thousands)
U.S. Government Agencies
6 $ 16,116 $ ( 83 ) 6 $ 13,938 $ ( 81 ) 12 $ 30,054 $ ( 164 )
Obligations of States and Political Subdivisions
— — — 1 509 ( 2 ) 1 509 ( 2 )
Mortgage Backed Securities- Government Sponsored Enterprises
7 20,003 ( 104 ) 1 1,711 ( 3 ) 8 21,714 ( 107 )
Total
13 $ 36,119 $ ( 187 ) 8 $ 16,158 $ ( 86 ) 21 $ 52,277 $ ( 273 )
For debt securities, the Company does not believe that any individual unrealized loss as of September 30, 2020 or December 31, 2019, represents an other-than-temporary impairment. The Company performs a review of the entire securities portfolio on a quarterly basis to identify securities that may indicate an other-than-temporary impairment. The Company’s management considers the length of time and the extent to which the fair value has been less than cost, and the financial condition of the issuer. The securities that are temporarily impaired at September 30, 2020 and December 31, 2019 relate principally to changes in interest rates subsequent to the acquisition of the specific securities. The Company does not intend to sell, or it is not more likely than not that it will be required to sell any of the securities in an unrealized loss position before recovery of its amortized cost or maturity of the security.
The following table presents the scheduled maturities of debt securities as of the date indicated:
September 30, 2020
Amortized
Cost
Fair
Value
(Dollars in thousands)
Due in One Year or Less
$ — $ —
Due after One Year through Five Years
4,303 4,380
Due after Five Years through Ten Years
55,267 56,462
Due after Ten Years
91,920 95,825
Total
$ 151,490 $ 156,667
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The following table presents gross gain and loss of sales of available-for-sale investment securities for the periods indicated.
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2020 2019 2020 2019
Debt Securities
Gross Gain $ — $ 50 $ 489 $ 62
Gross Loss — ( 47 ) — ( 112 )
Net Gain (Loss) on Sales of Investment Securities $ — $ 3 $ 489 $ ( 50 )
Marketable equity securities are measured at fair value with changes in fair value included in Change in Fair Value of Marketable Equity Securities on the Consolidated Statement of (Loss) Income. Realized gains and losses on sales of marketable equity securities are included in Net Gain (Loss) on Sales of Investment Securities on the Consolidated Statement of (Loss) Income. There were no sales of marketable equity securities for the three and nine months ended September 30, 2020 and 2019, respectively.
Note 4. Loans and Allowance for Loan Losses
The Company’s loan portfolio consists of four classifications: real estate loans, commercial and industrial loans, consumer loans, and other loans. The following table presents the classifications of loans as of the dates indicated.
September 30, 2020 December 31, 2019
Amount
Percent
Amount
Percent
(Dollars in thousands)
Real Estate:
Residential
$ 343,955 32.7 % $ 347,766 36.6 %
Commercial
353,904 33.7 351,360 36.9
Construction
69,178 6.6 35,605 3.7
Commercial and Industrial
144,315 13.7 85,586 9.0
Consumer
117,364 11.2 113,637 11.9
Other
22,169 2.1 18,542 1.9
Total Loans
1,050,885 100.0 % 952,496 100.0 %
Allowance for Loan Losses
( 13,780 ) ( 9,867 )
Loans, Net
$ 1,037,105 $ 942,629
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law on March 27, 2020 and provided over $2.0 trillion in emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic, which included authorizing the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). On April 16, 2020, the original $349 billion funding cap was reached. On April 23, 2020, the Paycheck Protection Program and Health Care Enhancement Act (the “PPP Enhancement Act”) was signed into law and included an additional $484 billion in COVID-19 relief, including allocating an additional $310 billion to replenish the PPP. The second round of the PPP began on April 27, 2020.
Under the PPP, participating SBA and other qualifying lenders can originate loans to eligible businesses that are fully guaranteed by the SBA as to principal and interest, have more favorable terms than traditional SBA loans and may be forgiven if the proceeds are used by the borrower for certain purposes. PPP is designed to help small businesses keep their workforce employed and cover expenses during the COVID-19 crisis. These loans have a two- or five-year loan term to maturity, an interest rate of 1% per annum and loan payments are deferred for six months. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of a PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expenses, with the remaining 40% of the loan proceeds used for other qualifying expenses. The Bank receives a processing fee from the SBA ranging from 1 % to 5 % depending on the size of the loan, which is offset by a 0.75 % third-party servicing agent fee.
As of September 30, 2020, the Bank originated 638 PPP loans totaling $ 71.0 million, with a median loan balance of $ 35,000 . Among the largest sectors impacted were $ 15.6 million in loans for health care and social assistance, $ 12.6 million for
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construction and specialty-trade contractors, $ 6.1 million for professional and technical services, $ 6.1 million for retail trade, $ 5.1 million for wholesale trade, $ 4.6 million for manufacturing and $ 3.4 million for restaurant and food services. Net SBA origination fees as of September 30, 2020 were $ 2.2 million, of which $ 274,000 was recognized for the three months ended September 30, 2020 and $ 465,000 for the nine months ended September 30, 2020. All PPP loans are classified as commercial and industrial loans held for investment. No allowance for loan loss was allocated to the PPP loan portfolio due to the Bank complying with the lender obligations that ensure SBA guarantee.
Total unamortized net deferred loan fees were $ 2.5 million and $ 907,000 at September 30, 2020 and December 31, 2019, respectively. The increase in unamortized net deferred loan fees is primarily due to PPP loans.
Real estate loans serviced for others, which are not included in the Consolidated Statement of Financial Condition, totaled $ 106.0 million and $ 100.0 million at September 30, 2020 and December 31, 2019, respectively.
The following table presents loans summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard and Doubtful within the internal risk rating system as of the dates indicated. At September 30, 2020 and December 31, 2019, there were no loans in the criticized category of Loss within the internal risk rating system.
September 30, 2020
Pass
Special
Mention
Substandard
Doubtful
Total
(Dollars in Thousands)
Real Estate:
Residential
$ 340,421 $ 1,045 $ 2,489 $ — $ 343,955
Commercial
311,125 29,383 13,396 — 353,904
Construction
65,158 3,379 641 — 69,178
Commercial and Industrial
137,871 4,197 1,614 633 144,315
Consumer
117,315 — 49 — 117,364
Other
22,089 80 — — 22,169
Total Loans
$ 993,979 $ 38,084 $ 18,189 $ 633 $ 1,050,885
December 31, 2019
Pass
Special
Mention
Substandard
Doubtful
Total
(Dollars in Thousands)
Real Estate:
Residential
$ 343,851 $ 1,997 $ 1,918 $ — $ 347,766
Commercial
335,436 12,260 3,664 — 351,360
Construction
33,342 2,263 — — 35,605
Commercial and Industrial
75,201 7,975 1,691 719 85,586
Consumer
113,527 — 110 — 113,637
Other
18,452 90 — — 18,542
Total Loans
$ 919,809 $ 24,585 $ 7,383 $ 719 $ 952,496
The increase of $ 13.5 million in the special mention loan category and $ 10.8 million in the substandard category as of September 30, 2020 compared to December 31, 2019 was mainly from the downgrade of the hospitality portfolio due to the economic conditions in that industry caused by the COVID-19 pandemic.
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The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of the dates indicated.
September 30, 2020
Loans
Current
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
Or More
Past Due
Total
Past Due
Non-
Accrual
Total
Loans
(Dollars in Thousands)
Real Estate:
Residential
$ 341,775 $ 281 $ 22 $ — $ 303 $ 1,877 $ 343,955
Commercial
345,772 — — — — 8,132 353,904
Construction
69,178 — — — — — 69,178
Commercial and Industrial
142,286 — — — — 2,029 144,315
Consumer
116,826 452 37 — 489 49 117,364
Other
22,169 — — — — — 22,169
Total Loans
$ 1,038,006 $ 733 $ 59 $ — $ 792 $ 12,087 $ 1,050,885
December 31, 2019
Loans
Current
30-59
Days
Past Due
60-89
Days
Past Due
90 Days
Or More
Past Due
Total
Past Due
Non-
Accrual
Total
Loans
(Dollars in Thousands)
Real Estate:
Residential
$ 342,010 $ 3,462 $ 281 $ 196 $ 3,939 $ 1,817 $ 347,766
Commercial
351,104 22 — — 22 234 351,360
Construction
35,605 — — — — — 35,605
Commercial and Industrial
84,280 388 178 — 566 740 85,586
Consumer
112,438 923 140 26 1,089 110 113,637
Other
18,542 — — — — — 18,542
Total Loans
$ 943,979 $ 4,795 $ 599 $ 222 $ 5,616 $ 2,901 $ 952,496
The increase in nonaccrual commercial real estate loans is primarily related to two hotel loans with a total principal balance of $ 7.9 million that were impacted by the pandemic and determined to be impaired due to insufficient cash flows and occupancy rates. The increase in nonaccrual commercial and industrial loans is primarily related to a $ 1.4 million relationship with collateral and income shortfalls.
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The following table sets forth the amounts and categories of nonperforming assets at the dates indicated. Included in nonperforming loans and assets are troubled debt restructurings (“TDRs”), which are loans whose contractual terms have been restructured in a manner which grants a concession to a borrower experiencing financial difficulties. Nonaccrual TDRs are included in their specific loan category in the nonaccrual loans section. Nonperforming loans do not include loans modified under Section 4013 of the CARES Act and interagency guidance as further explained below.
September 30,
2020 		December 31,
2019
(Dollars in Thousands)
Nonaccrual Loans:
Real Estate:
Residential
$ 1,877 $ 1,817
Commercial
8,132 234
Commercial and Industrial
2,029 740
Consumer
49 110
Total Nonaccrual Loans
12,087 2,901
Accruing Loans Past Due 90 Days or More:
Real Estate:
Residential
— 196
Consumer
— 26
Total Accruing Loans Past Due 90 Days or More
— 222
Total Nonaccrual Loans and Accruing Loans Past Due 90 Days or More
12,087 3,123
Troubled Debt Restructurings, Accruing:
Real Estate
Residential
660 511
Commercial
2,162 1,648
Commercial and Industrial
96 100
Total Troubled Debt Restructurings, Accruing
2,918 2,259
Total Nonperforming Loans
15,005 5,382
Other Real Estate Owned:
Residential
14 41
Commercial
208 192
Total Other Real Estate Owned
222 233
Total Nonperforming Assets
$ 15,227 $ 5,615
Nonperforming Loans to Total Loans
1.43 % 0.57 %
Nonperforming Assets to Total Assets
1.09 0.42
The recorded investment of residential real estate loans for which formal foreclosure proceedings were in process according to applicable requirements of the local jurisdiction was $ 805,000 and $ 1.1 million at September 30, 2020 and December 31, 2019, respectively.
TDRs typically are the result of loss mitigation activities whereby concessions are granted to minimize loss and avoid foreclosure or repossession of collateral. For a loan modification to be considered a TDR, the borrower must be experiencing financial difficulty and a concession must be granted, except for an insignificant delay in payment. Section 4013 of the CARES Act provides temporary relief from accounting and financial reporting requirements for TDRs regarding certain loan modifications related to COVID-19. Specifically, the CARES Act provides that the Bank may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR and suspend any determination that such loan modifications would be considered a TDR, including the related impairment for accounting purposes. Any modification involving
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a loan that was not more than 30 days past due as of December 31, 2019 and that occurs beginning on March 1, 2020 and ends on the earlier of December 31, 2020 or the date that is 60 days after the termination date of the national emergency related to the COVID-19 outbreak qualify for this exception, including a forbearance arrangement, interest rate modification, repayment plan or any other similar arrangement that defers or delays the payment of principal or interest.
Bank regulatory agencies released an interagency statement that offers practical expedients for modifications that occur in response to the COVID-19 pandemic, but it differs with the CARES Act in certain areas. The expedients require a lender to conclude that a borrower is not experiencing financial difficulty if either short-term (e.g., six months or less) modifications are made, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented or the modification or deferral program is mandated by the federal government or a state government. The bank regulatory agencies have subsequently confirmed that their guidance could be applicable for loans that do not qualify for favorable accounting treatment under Section 4013 of the CARES Act. Both Section 4013 of the CARES Act and the interagency statement can be applied to a second modification that occurs after the first modification provided that the second modification does not qualify as a TDR under Section 4013 of the CARES Act or the interagency statement. In its evaluation of whether a payment deferral qualifies as short-term under the interagency statement, an entity should assess multiple payment deferrals collectively (i.e., the cumulative deferrals cannot exceed six months).
The Bank offered forbearance options for borrowers impacted by COVID-19 that provide a short-term delay in payment by primarily allowing: (a) deferral of three months of payments; or (b) for consumer loans not secured by a real estate mortgage, three months of interest-only payments that also extends the maturity date of the loan by three months . During the forbearance period, the borrower is not considered delinquent for credit bureau reporting purposes. The Company has elected the practical expedients related to TDRs that are available in the CARES Act and interagency guidance as an entity-wide accounting policy and does not consider any of the forbearance agreements TDRs, delinquent, or nonaccrual.
The following table provides details of loans in forbearance and the forbearance end dates as of the dates indicated.
September 30, 2020 June 30, 2020
Number
of
Loans 		Amount % of Portfolio Number
of
Loans 		Amount % of Portfolio
(Dollars in thousands)
Real Estate:
Residential 11 1,242 0.4 % 163 23,653 6.9 %
Commercial 9 13,885 3.9 % 111 105,117 30.0 %
Construction 1 7,162 10.4 % 6 15,518 26.6 %
Commercial and Industrial 1 122 0.1 % 76 15,697 10.5 %
Consumer 12 295 0.3 % 170 3,447 2.9 %
Other — — — % 1 2,504 11.2 %
Total Loans in Forbearance 34 $ 22,706 2.2 % 527 $ 165,936 15.9 %
The commercial real estate loans remaining in deferral at September 30, 2020 include five hotel loans totaling $ 10.3 million and the construction loan is a retail project. The loans are scheduled to exit their deferral period in the fourth quarter.
The concessions granted for the TDRs in the portfolio primarily consist of, but are not limited to, modification of payment or other terms, temporary rate modification and extension of maturity date. Loans classified as TDRs consisted of 18 loans totaling $ 3.6 million at September 30, 2020 and 16 loans totaling $ 3.0 million at December 31, 2019, respectively.
During the nine months ended September 30, 2020, there was one residential real estate loan modified in a TDR totaling $ 60,000 that paid off. During the nine months ended September 30, 2019, one residential real estate loan modified in a TDR totaling $ 851,000 paid off. No TDRs subsequently defaulted during the three and nine months ended September 30, 2020 and 2019, respectively.
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The following tables present information at the time of modification related to loans modified in a TDR during the three and nine months ended September 30, 2020 and 2019.
Three Months Ended September 30, 2020
Number
of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Related
Allowance
(Dollars in thousands)
Real Estate:
Commercial 1 $ 504 $ 519 $ —
Commercial and Industrial 1 38 38 —
Total 2 $ 542 $ 557 $ —

Nine Months Ended September 30, 2020
Number
of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Related
Allowance
(Dollars in thousands)
Real Estate:
Residential
1 $ 234 $ 234 $ —
Commercial 1 504 519 —
Commercial and Industrial 1 38 38 —
Total 3 $ 776 $ 791 $ —

Three Months Ended June 30, 2019
Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment Related Allowance
(Dollars in thousands)
Real Estate:
Residential 1 $ 10 $ 10 $ —
Total 1 $ 10 10 $ —

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Nine Months Ended September 30, 2019
Number
of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Related
Allowance
(Dollars in thousands)
Real Estate:
Residential 2 $ 71 $ 71 $ —
Commercial and Industrial 1 114 114 —
Total 3 $ 185 $ 185 $ —
The following table presents a summary of the loans considered to be impaired as of the dates indicated.
September 30, 2020
Recorded
Investment
Related
Allowance
Unpaid
Principal
Balance
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
With No Related Allowance Recorded:
Real Estate:
Residential
$ 1,216 $ — $ 1,220 $ 1,220 $ 34
Commercial
20,896 — 20,916 25,193 811
Construction
641 — 641 766 21
Commercial and Industrial
881 — 1,069 936 6
Total With No Related Allowance Recorded
$ 23,634 $ — $ 23,846 $ 28,115 $ 872
With A Related Allowance Recorded:
Real Estate:
Commercial
$ 9,498 $ 2,248 $ 9,528 $ 9,610 $ 291
Commercial and Industrial
1,528 607 1,528 1,609 45
Total With A Related Allowance Recorded
$ 11,026 $ 2,855 $ 11,056 $ 11,219 $ 336
Total Impaired Loans:
Real Estate:
Residential
$ 1,216 $ — $ 1,220 $ 1,220 $ 34
Commercial
30,394 2,248 30,444 34,803 1,102
Construction
641 — 641 766 21
Commercial and Industrial
2,409 607 2,597 2,545 51
Total Impaired Loans
$ 34,660 $ 2,855 $ 34,902 $ 39,334 $ 1,208
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December 31, 2019
Recorded
Investment
Related
Allowance
Unpaid
Principal
Balance
Average
Recorded
Investment
Interest
Income
Recognized
(Dollars in thousands)
With No Related Allowance Recorded:
Real Estate:
Residential
$ 549 $ — $ 553 $ 494 $ 20
Commercial
3,058 — 3,077 3,335 177
Commercial and Industrial
133 — 135 156 6
Total With No Related Allowance Recorded
$ 3,740 $ — $ 3,765 $ 3,985 $ 203
With A Related Allowance Recorded:
Real Estate:
Commercial
$ 1,646 $ 274 $ 1,646 $ 1,702 $ 81
Commercial and Industrial
2,378 610 2,529 2,448 113
Total With A Related Allowance Recorded
$ 4,024 $ 884 $ 4,175 $ 4,150 $ 194
Total Impaired Loans
Real Estate:
Residential
$ 549 $ — $ 553 $ 494 $ 20
Commercial
4,704 274 4,723 5,037 258
Commercial and Industrial
2,511 610 2,664 2,604 119
Total Impaired Loans
$ 7,764 $ 884 $ 7,940 $ 8,135 $ 397
The $ 26.9 million increase in recorded investment of loans evaluated for impairment, primarily in the commercial real estate category, is mainly due to evaluating the hotel portfolio for potential impairment. $ 16.1 million of hotel loans were evaluated for impairment and determined to not require specific reserves. Two hotel loans with a total principal balance of $ 7.9 million were determined to be impaired due to insufficient cash flows and occupancy rates.
The following tables present the activity in the allowance for loan losses (“ALLL”) summarized by major classifications and segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for potential impairment at the dates and for the periods indicated.
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
June 30, 2020 $ 2,688 $ 5,160 $ 820 $ 1,566 $ 1,714 $ — $ 700 $ 12,648
Charge-offs
( 11 ) — — — ( 103 ) — — ( 114 )
Recoveries
1 1 — 6 38 — — 46
Provision
( 506 ) 1,711 71 170 ( 290 ) — 44 1,200
September 30, 2020 $ 2,172 $ 6,872 $ 891 $ 1,742 $ 1,359 $ — $ 744 $ 13,780
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Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
December 31, 2019 $ 2,023 $ 3,210 $ 285 $ 2,412 $ 1,417 $ — $ 520 $ 9,867
Charge-offs
( 36 ) — — — ( 239 ) — — ( 275 )
Recoveries
5 28 — 21 134 — — 188
Provision
180 3,634 606 ( 691 ) 47 — 224 4,000
September 30, 2020 $ 2,172 $ 6,872 $ 891 $ 1,742 $ 1,359 $ — $ 744 $ 13,780
September 30, 2020
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ — $ 2,248 $ — $ 607 $ — $ — $ — $ 2,855
Collectively Evaluated for Potential Impairment
$ 2,172 $ 4,624 $ 891 $ 1,135 $ 1,359 $ — $ 744 $ 10,925
December 31, 2019
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ — $ 274 $ — $ 610 $ — $ — $ — $ 884
Collectively Evaluated for Potential Impairment
$ 2,023 $ 2,936 $ 285 $ 1,802 $ 1,417 $ — $ 520 $ 8,983
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
June 30, 2019 $ 1,096 $ 3,446 $ 488 $ 2,718 $ 1,500 $ — $ 443 $ 9,691
Charge-offs
( 28 ) — — ( 16 ) ( 165 ) — — ( 209 )
Recoveries
1 35 — 5 52 — — 93
Provision
582 ( 508 ) 49 ( 278 ) 76 — 254 175
September 30, 2019 $ 1,651 $ 2,973 $ 537 $ 2,429 $ 1,463 $ — $ 697 $ 9,750
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Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
December 31, 2018 $ 1,050 $ 2,693 $ 395 $ 2,807 $ 2,027 $ — $ 586 $ 9,558
Charge-offs
( 71 ) — — ( 16 ) ( 451 ) — — ( 538 )
Recoveries
10 56 — 7 107 — — 180
Provision
662 224 142 ( 369 ) ( 220 ) — 111 550
September 30, 2019 $ 1,651 $ 2,973 $ 537 $ 2,429 $ 1,463 $ — $ 697 $ 9,750
September 30, 2019
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Unallocated
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ — $ 300 $ — $ 503 $ — $ — $ — $ 803
Collectively Evaluated for Potential Impairment
$ 1,651 $ 2,673 $ 537 $ 1,926 $ 1,463 $ — $ 697 $ 8,947
The COVID-19 pandemic has resulted in a dramatic increase in unemployment and recessionary economic conditions. Based on evaluation of the macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis related to economic trends and industry conditions, specifically because of vulnerable industries such as hospitality, oil and gas, retail and restaurants, were adjusted in the current year for these circumstances. In addition, the Company has an exposure of hotel loans that have been greatly impacted by the COVID-19 pandemic and were evaluated for impairment in the current quarter. Two hotel loans with a total principal balance of $ 7.9 million were determined to be impaired due to insufficient cash flows and occupancy rates. The combination of these factors primarily resulted in a $ 1.2 million provision for loan losses for the three months ended September 30, 2020 and $ 4.0 million provision for loan losses for the nine months ended September 30, 2020.
Prior to the quarter ended March 31, 2020, management determined historical loss experience for each segment of loans using a two-year rolling average of the net charge-off data within each loan segment, which was then used in combination with qualitative factors to calculate the general allowance component that covers pools of homogeneous loans that are not specifically evaluated for impairment. For the quarter ended March 31, 2020, the Company began using a five-year rolling average of the net charge-off data within each segment. This change was driven by no net charge-off experience in the commercial real estate and commercial and industrial segments in the prior two-year rolling period as of March 31, 2020, which the Company believes does not represent the inherent risks in those segments. In the first quarter of 2018, the Company incurred $ 1.4 million of commercial and industrial charge-offs, however this period would have been removed from the lookback period as of March 31, 2020 if continuing to use a two-year history. In addition, moving to a five-year history is expected to improve the calculation moving forward by capturing economic ebbs and flows over a longer period while also not heavily weighting one period of charge-off activity.
The following table presents changes in the accretable discount on the loans acquired at fair value at the dates indicated.
Accretable Discount
(Dollars in Thousands)
December 31, 2019 $ 1,628
Accretable Yield
( 293 )
September 30, 2020 $ 1,335
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The following table presents the major classifications of loans summarized by individually evaluated for impairment and collectively evaluated for potential impairment as of the dates indicated.
September 30, 2020
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ 1,216 $ 30,394 $ 641 $ 2,409 $ — $ — $ 34,660
Collectively Evaluated for Potential Impairment
342,739 323,510 68,537 141,906 117,364 22,169 1,016,225
Total Loans
$ 343,955 $ 353,904 $ 69,178 $ 144,315 $ 117,364 $ 22,169 $ 1,050,885
At September 30, 2020, commercial and industrial contains $ 71.0 million of PPP loans collectively evaluated for potential impairment. No allowance for loan loss was allocated to the PPP loan portfolio due to the Bank complying with the lender obligations that ensure SBA guarantee.
December 31, 2019
Real
Estate
Residential
Real
Estate
Commercial
Real
Estate
Construction
Commercial
and
Industrial
Consumer
Other
Total
(Dollars in thousands)
Individually Evaluated for Impairment
$ 549 $ 4,704 $ — $ 2,511 $ — $ — $ 7,764
Collectively Evaluated for Potential Impairment
347,217 346,656 35,605 83,075 113,637 18,542 944,732
Total Loans $ 347,766 $ 351,360 $ 35,605 $ 85,586 $ 113,637 $ 18,542 $ 952,496
Note 5. Deposits
The following table shows the maturities of time deposits for the next five years and beyond at the date indicated.
September 30,
2020
(Dollars in thousands)
One Year or Less
$ 86,604
Over One Through Two Years
36,463
Over Two Through Three Years
47,161
Over Three Through Four Years
9,527
Over Four Through Five Years
12,183
Over Five Years
4,312
Total
$ 196,250
The balance in time deposits that meet or exceed the FDIC insurance limit of $250,000 totaled $ 61.6 million and $ 69.3 million as of September 30, 2020 and December 31, 2019, respectively.
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Note 6. Short-Term Borrowings
The following table sets forth the components of short-term borrowings as of the dates indicated.
September 30, 2020 December 31, 2019
Amount Weighted
Average
Rate 		Amount Weighted
Average
Rate
(Dollars in thousands)
Securities Sold Under Agreements to Repurchase:
Balance at Period End $ 42,061 0.21 % $ 30,571 0.57 %
Average Balance Outstanding During the Period 35,922 0.42 29,976 0.62
Maximum Amount Outstanding at any Month End 43,367 34,197
Securities Collaterizing the Agreements at Period-End:
Carrying Value 44,601 37,584
Market Value 45,767 37,873
Note 7. Other Borrowed Funds
Other borrowed funds consist of fixed rate advances from the Federal Home Loan Bank of Pittsburgh (“FHLB”). The following table sets forth the scheduled maturities of other borrowed funds at the dates indicated.
September 30, 2020 December 31, 2019
Amount
Weighted
Average
Rate
Amount
Weighted
Average
Rate
(Dollars in thousands)
Due in One Year
$ 5,000 2.09 % $ 6,000 1.97 %
Due After One Year to Two Years
3,000 2.23 5,000 2.18
Due After Two Years to Three Years
3,000 2.41 3,000 2.41
Total
$ 11,000 2.21 % $ 14,000 2.14 %
As of September 30, 2020, the Company maintained a credit arrangement with a maximum borrowing limit of approximately $ 430.7 million with the FHLB and available borrowing capacity of $ 416.9 million. This arrangement is subject to annual renewal, incurs no service charge, and is secured by a blanket security agreement on $ 577.1 million of residential and commercial mortgage loans and the Company’s investment in FHLB stock. Under this arrangement the Company had available a variable rate Line of Credit in the amount of $ 150.0 million as of September 30, 2020, of which there was no outstanding balance as of September 30, 2020.
At September 30, 2020, the Company maintained a Borrower-In-Custody of Collateral line of credit agreement with the Federal Reserve Bank (“FRB”) for $ 95.7 million that requires monthly certification of collateral, is subject to annual renewal, incurs no service charge and is secured by $ 145.3 million of commercial and industrial and consumer indirect auto loans. In addition, the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $ 60.0 million of which no draws had been taken.
Note 8. Fair Value Disclosure
FASB ASC 820 “Fair Value Measurement” defines fair value and provides the framework for measuring fair value and required disclosures about fair value measurements. Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants in the principal or most advantageous market for the asset or liability at the transaction date. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used in valuation methods to determine fair value.
The three levels of fair value hierarchy are as follows:
Level 1 –    Fair value is based on unadjusted quoted prices in active markets that are accessible to the Company for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available.
Level 2 –    Fair value is based on significant inputs, other than Level 1 inputs, that are observable either directly or indirectly for substantially the full term of the asset through corroboration with observable market data. Level 2 inputs
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include quoted market prices in active markets for similar assets, quoted market prices in markets that are not active for identical or similar assets, and other observable inputs.
Level 3 –    Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows, and other similar techniques.
This hierarchy requires the use of observable market data when available. The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement.
The following table presents the financial assets measured at fair value on a recurring basis and reported on the Consolidated Statement of Financial Condition as of the dates indicated, by level within the fair value hierarchy. The majority of the Company’s securities are included in Level 2 of the fair value hierarchy. Fair values for Level 2 securities were primarily determined by a third-party pricing service using both quoted prices for similar assets, when available, and model-based valuation techniques that derive fair value based on market-corroborated data, such as instruments with similar prepayment speeds and default interest rates. The standard inputs that are normally used include benchmark yields of like securities, reportable trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. There were no transfers into or out of Level 3 during the nine months ended September 30, 2020 or year ended December 31, 2019.
Fair Value
Hierarchy
September 30,
2020 		December 31,
2019
(Dollars in thousands)
Available for Sales Securities:
Debt Securities:
U.S. Government Agencies
Level 2
$ 41,832 $ 48,056
Obligations of States and Political Subdivisions
Level 2
22,051 25,843
Mortgage-Backed Securities - Government-Sponsored Enterprises
Level 2
92,784 120,776
Total Debt Securities
156,667 194,675
Marketable Equity Securities:
Mutual Funds
Level 1
1,022 997
Other
Level 1
1,267 1,713
Total Marketable Equity Securities
2,289 2,710
Total Available-for-Sale Securities
$ 158,956 $ 197,385
The following table presents the financial assets on the Consolidated Statement of Financial Condition measured at fair value on a nonrecurring basis as of the dates indicated by level within the fair value hierarchy for only those nonrecurring assets that had a fair value below the carrying amount. The table also presents the significant unobservable inputs used in the fair value measurements.
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Fair Value at
Financial Asset Fair Value
Hierarchy 		September 30,
2020 		December 31,
2019 		Valuation
Techniques 		Significant
Unobservable Inputs 		Range
(Dollars in thousands)
Impaired Loans Level 3 $ 8,171 $ 3,140 Market Comparable Properties Marketability Discount 10 % to 30 % (1)
Premises and Equipment, Net Level 3 240 — Market Comparable Properties Price Per Square Footage $ 26.88 to $ 34.79
Mortgage Servicing Rights Level 3 694 930 Discounted Cash Flow Discount Rate 9 % to 11 %
Prepayment Rate 15.7 % to 21.4 %
OREO Level 3 34 58 Market Comparable Properties Marketability Discount 10 % to 30 % (1)
(1) Range includes discounts taken since appraisal and estimated values.
Impaired loans are evaluated when a loan is identified as impaired and valued at the lower of cost or fair value at that time. Impaired loans that are collateral dependent are written down to fair value through the establishment of specific reserves. Fair value is measured based on the value of the collateral securing these loans and is classified as Level 3 in the fair value hierarchy. At September 30, 2020 and December 31, 2019, the fair value of impaired loans consists of the loan balances of $ 11.0 million and $ 4.0 million, respectively, less their specific valuation allowances of $ 2.9 million and $ 884,000 , respectively.
Given the change in business purpose of the Monessen branch due to closure, an appraisal was obtained to determine the property value and, as a result, the property was written down to fair value based on market comparable properties. The fair value was determined from a qualified independent appraisal and is classified as Level 3 in the fair value hierarchy.
The fair value of mortgage servicing rights ("MSRs") is determined by calculating the present value of estimated future net servicing cash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on current market conditions. The expected rate of mortgage loan prepayments is the most significant factor driving the value of MSRs. MSRs are considered impaired if the carrying value exceeds fair value. Since the valuation model includes significant unobservable inputs as listed above, MSRs are classified as Level 3. MSRs are reported in other assets in the Consolidated Statement of Financial Condition and are amortized into mortgage servicing income in Other (Loss) Income in the Consolidated Statement of (Loss) Income.
OREO properties are evaluated at the time of acquisition and recorded at fair value, less estimated selling costs. After acquisition, OREO is recorded at the lower of cost or fair value, less estimated selling costs. The fair value of an OREO property is determined from a qualified independent appraisal and is classified as Level 3 in the fair value hierarchy.
For the nine months ended September 30, 2020, one commercial real estate OREO property with a fair value of $ 18,000 sold at a gain of $ 4,000 and two residential real estate OREO properties with a fair value of $ 108,000 sold at a loss of $ 30,000 . In addition, two residential real estate loans with a fair value of $ 81,000 and one commercial real estate loan with a fair value of $ 34,000 transferred to OREO.
For the nine months ended September 30, 2019, one commercial real estate OREO property with a fair value of $ 697,000 was sold at a $ 33,000 gain and one residential OREO property with a fair value of $ 46,000 was sold at a loss of $ 3,000 . In addition, three residential real estate loans with a fair value of $ 427,000 transferred into OREO, of which two properties with a fair value of $ 386,000 were subsequently sold at a net loss of $ 36,000 .
Financial instruments are defined as cash, evidence of an ownership in an entity, or a contract which creates an obligation or right to receive or deliver cash or another financial instrument from/to a second entity on potentially favorable or unfavorable terms.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. If no readily available market exists, the fair value estimates for financial instruments should be based upon management’s judgment regarding current economic conditions, interest rate risk, expected cash flows, future estimated losses and other factors, as determined through various option pricing formulas or simulation modeling. As many of these assumptions result from judgments made by management based upon estimates which are inherently uncertain, the resulting estimated fair values may not be indicative of the amount realizable in the sale of a particular financial instrument. In addition,
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changes in the assumptions on which the estimated fair values are based may have significant impact on the resulting estimated fair values.
As certain assets such as deferred tax assets and premises and equipment are not considered financial instruments, the estimated fair value of financial instruments would not represent the full value of the Company.
The following table presents the estimated fair values of the Company’s financial instruments at the dates indicated.
September 30, 2020 December 31, 2019
Fair Value
Hierarchy
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
(Dollars in thousands)
Financial Assets:
Cash and Due From Banks:
Interest Bearing
Level 1
$ 102,400 $ 102,400 $ 68,798 $ 68,798
Non-Interest Bearing
Level 1
9,769 9,769 11,419 11,419
Investment Securities:
Available for Sale
See Above
158,956 158,956 197,385 197,385
Loans, Net
Level 3
1,037,105 1,076,438 942,629 961,110
Restricted Stock
Level 2
3,961 3,961 3,656 3,656
Bank-Owned Life Insurance
Level 2
24,639 24,639 24,222 24,222
Mortgage Servicing Rights Level 3 694 694 930 930
Accrued Interest Receivable
Level 2
4,241 4,241 3,297 3,297
Financial Liabilities:
Deposits
Level 2
1,199,036 1,207,246 1,118,359 1,128,078
Short-term Borrowings
Level 2
42,061 42,061 30,571 30,571
Other Borrowed Funds
Level 2
11,000 11,138 14,000 15,380
Accrued Interest Payable
Level 2
735 735 987 987

Note 9. Commitments and Contingent Liabilities
The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business primarily to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and performance letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statement of Financial Condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby and performance letters of credit written is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
Commitments and conditional obligations are evaluated the same as on-balance-sheet instruments but do not have a corresponding reserve recorded. The Company’s opinion on not implementing a corresponding reserve for off-balance-sheet instruments is supported by historical factors of no losses recorded due to these items. The Company is continually evaluating these items for credit quality and any future need for the corresponding reserve.
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The following table presents the unused and available credit balances of financial instruments whose contracts represent credit risk at the dates indicated.
September 30,
2020 		December 31,
2019
(Dollars in thousands)
Standby Letters of Credit
$ 80,369 $ 42,041
Performance Letters of Credit
2,329 2,521
Construction Mortgages
62,167 59,689
Personal Lines of Credit
6,897 6,456
Overdraft Protection Lines
6,407 6,415
Home Equity Lines of Credit
20,609 20,560
Commercial Lines of Credit
68,685 102,422
Total Commitments
$ 247,463 $ 240,104
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.
Performance letters of credit represent conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These instruments are issued primarily to support bid or performance-related contracts. The coverage period for these instruments is typically a one-year period with an annual renewal option subject to prior approval by management. Fees earned from the issuance of these letters are recognized upon expiration of the letter. For secured letters of credit, the collateral is typically Company deposit instruments or customer business assets.
Note 10. Leases
The Company evaluates contracts at commencement to determine if a lease is present. The Company’s lease contracts are all classified as operating leases and create operating right-of-use (“ROU”) assets and corresponding lease liabilities on the balance sheet. The leases are primarily ROU assets of land and building for branch and loan production locations. ROU assets are reported in accrued interest and other assets and the related lease liabilities in accrued interest and other liabilities on the Consolidated Statement of Financial Condition.
The following tables present the lease expense, ROU assets, weighted average term, discount rate and maturity analysis of lease liabilities for operating leases for the periods and dates indicated.
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2020 2019 2020 2019
(Dollars in thousands)
Operating Lease Expense $ 118 $ 114 $ 353 $ 344
Variable Lease Expense 10 17 28 32
Total Lease Expense $ 128 $ 131 $ 381 $ 376
September 30,
2020 		December 31,
2019
Operating Leases:
ROU Assets $ 1,202 $ 1,289
Weighted Average Lease Term in Years 7.22 7.06
Weighted Average Discount Rate 2.55 % 2.89 %
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September 30,
2020
Maturity Analysis:
Due in One Year $ 348
Due After One Year to Two Years 255
Due After Two Years to Three Years 156
Due After Three Years to Four Years 113
Due After Four to Five Years 90
Due After Five Years 375
Total $ 1,337
Less: Present Value Discount 132
Lease Liabilities $ 1,205
Note 11. Other Noninterest Expense
The details of other noninterest expense for the Company’s Consolidated Statement of (Loss) Income for the three and nine months ended September 30, 2020 and 2019, are as follows:
Three Months Ended
September 30, 		Nine Months Ended
September 30,
2020 2019 2020 2019
(Dollars in thousands)
Non-Employee Compensation $ 155 $ 131 $ 449 $ 402
Printing and Supplies 125 96 365 289
Postage 61 62 176 195
Telephone 108 157 408 459
Charitable Contributions 32 53 98 146
Dues and Subscriptions 36 34 153 132
Loan Expenses 149 133 420 345
Meals and Entertainment — 23 74 124
Travel 13 50 87 147
Training 10 18 24 40
Bank Assessment 44 43 132 128
Insurance 59 55 173 168
Miscellaneous 127 129 418 489
Total Other Noninterest Expense $ 919 $ 984 $ 2,977 $ 3,064
Note 12. Segment and Related Information
At September 30, 2020, the Company’s business activities were comprised of two operating segments, which are community banking and insurance brokerage services. CB Financial is the parent company of the Bank and Exchange Underwriters, a wholly owned subsidiary of the Bank. Exchange Underwriters has an independent board of directors from the Company and is managed separately from the banking and related financial services that the Company offers. Exchange Underwriters is an independent insurance agency that offers property, casualty, commercial liability, surety and other insurance products.
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The following is a table of selected financial data for the Company’s subsidiaries and consolidated results at the dates and for the periods indicated.
Community Bank Exchange Underwriters, Inc. CB Financial Services, Inc. Net Eliminations Consolidated
(Dollars in thousands)
September 30, 2020
Assets $ 1,392,537 $ 4,408 $ 133,314 $ ( 137,383 ) $ 1,392,876
Liabilities 1,264,864 1,701 15 ( 7,003 ) 1,259,577
Stockholders' equity 127,673 2,707 133,299 ( 130,380 ) 133,299
December 31, 2019
Assets $ 1,321,001 $ 4,076 $ 151,124 $ ( 154,664 ) $ 1,321,537
Liabilities 1,178,759 1,194 27 ( 9,540 ) 1,170,440
Stockholders' equity 142,242 2,882 151,097 ( 145,124 ) 151,097
Three Months Ended September 30, 2020
Interest and dividend income $ 11,639 $ 1 $ 1,310 $ ( 1,294 ) $ 11,656
Interest expense 1,240 — — — 1,240
Net interest and dividend income 10,399 1 1,310 ( 1,294 ) 10,416
Provision for loan losses 1,200 — — — 1,200
Net interest and dividend income after provision for loan losses 9,199 1 1,310 ( 1,294 ) 9,216
Noninterest income 1,208 1,024 ( 59 ) — 2,173
Noninterest expense 28,046 919 3 — 28,968
Undistributed net income (loss) of subsidiary 73 — ( 18,694 ) 18,621 —
(Loss) income before income tax (benefit) expense ( 17,566 ) 106 ( 17,446 ) 17,327 ( 17,579 )
Income tax (benefit) expense ( 166 ) 33 ( 51 ) — ( 184 )
Net (loss) income $ ( 17,400 ) $ 73 $ ( 17,395 ) $ 17,327 $ ( 17,395 )
Nine Months Ended September 30, 2020
Interest and dividend income $ 35,664 $ 3 $ 2,634 $ ( 2,589 ) $ 35,712
Interest expense 4,442 — — — 4,442
Net interest income 31,222 3 2,634 ( 2,589 ) 31,270
Provision for loan losses 4,000 — — — 4,000
Net interest and dividend income after provision for loan losses 27,222 3 2,634 ( 2,589 ) 27,270
Noninterest income (loss) 3,760 3,426 ( 493 ) — 6,693
Noninterest expense 44,227 2,806 9 — 47,042
Undistributed net (loss) income of subsidiary 433 — ( 15,991 ) 15,558 —
(Loss) income before income tax expense (benefit) ( 12,812 ) 623 ( 13,859 ) 12,969 ( 13,079 )
Income tax expense (benefit) 590 190 ( 140 ) — 640
Net (loss) income $ ( 13,402 ) $ 433 $ ( 13,719 ) $ 12,969 $ ( 13,719 )
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Community Bank Exchange Underwriters, Inc. CB Financial Services, Inc. Net Eliminations Consolidated
(Dollars in thousands)
Three Months Ended September 30, 2019
Interest and dividend income $ 13,083 $ 1 $ 1,318 $ ( 1,304 ) $ 13,098
Interest expense 2,002 — — — 2,002
Net interest and dividend income 11,081 1 1,318 ( 1,304 ) 11,096
Provision for loan losses 175 — — — 175
Net interest and dividend income after provision for loan losses 10,906 1 1,318 ( 1,304 ) 10,921
Noninterest income (loss) 1,018 984 ( 36 ) — 1,966
Noninterest expense 7,401 853 3 — 8,257
Undistributed net income of subsidiary 90 — 2,463 ( 2,553 ) —
Income before income tax expense (benefit) 4,613 132 3,742 ( 3,857 ) 4,630
Income tax expense (benefit) 846 42 ( 4 ) — 884
Net income $ 3,767 $ 90 $ 3,746 $ ( 3,857 ) $ 3,746
Nine Months Ended September 30, 2019
Interest and dividend income $ 38,018 $ 2 $ 3,955 $ ( 3,912 ) $ 38,063
Interest expense 5,828 — — — 5,828
Net interest and dividend income 32,190 2 3,955 ( 3,912 ) 32,235
Provision for loan losses 550 — — — 550
Net interest and dividend income after provision for loan losses 31,640 2 3,955 ( 3,912 ) 31,685
Noninterest income 2,966 3,212 67 — 6,245
Noninterest expense 23,209 2,716 9 — 25,934
Undistributed net income of subsidiary 340 — 5,654 ( 5,994 ) —
Income before income tax expense 11,737 498 9,667 ( 9,906 ) 11,996
Income tax expense 2,171 158 17 — 2,346
Net income $ 9,566 $ 340 $ 9,650 $ ( 9,906 ) $ 9,650
Note 13. Goodwill and Intangible Assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Deemed to have an indefinite life and not subject to amortization, goodwill is instead tested for impairment at the reporting unit level at least annually on October 31 or more frequently if triggering events occur or impairment indicators exist. The Company operates two reporting units – Community Banking segment and Insurance Brokerage Services segment. The Company has assigned 100 % of the goodwill to the Community Banking reporting unit.
In 2019, the Company adopted ASU 2017-04 whereby the Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a step one impairment test is unnecessary. An entity also has the option to bypass the qualitative assessment for any reporting unit and proceed directly to the first step of impairment testing.
The COVID-19 pandemic that has impacted the U.S. and most of the world along with government response to curtail the spread of the virus beginning in March 2020 has significantly impacted our market area. These restrictions have resulted in significant adverse effects on macroeconomic conditions, and stock market valuations have decreased substantially for most companies in the banking sector, including our Company. In light of the adverse circumstances resulting from COVID-19, management determined it was necessary to evaluate goodwill for impairment.
Determining the fair value of a reporting unit under a quantitative goodwill impairment test is judgmental and involves the use of significant estimates and assumptions. The methodology used to assess impairment was a combination of the income approach
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(i.e. discounted cash flow (“DCF”) method) and the market approach (i.e. Guideline Public Company ("GPC") method) to determine the fair value.
In the application of the income approach, the Company determined the fair value of the reporting unit using a DCF analysis. The income approach uses valuation techniques to convert future earnings or cash flows to present value to arrive at a value that is indicated by market expectations about future amounts. The income approach relies on Level 3 inputs along with a market-derived cost of capital when measuring fair value. Fair value is determined by converting anticipated benefits into a present single value. Once the benefit or benefits are selected, an appropriate discount or capitalization rate is applied to each benefit. These rates are calculated using the appropriate measure for the size and type of company, using financial models and market data as required. The discount rate was derived based on the modified capital asset pricing model. The discount rate applied is comprised of a risk-free rate of return, an equity risk premium, a size premium and a factor covering the systemic market risk and a company specific risk premium. The values for the factors applied are determined primarily using external sources of information. The discount rate was estimated at 13.3 %. Using the discount rate derived from the above components, we subtracted an expected sustainable long-term growth estimate of 3.0 % given expected growth in the geographic market and the overall long-term economy to arrive at a capitalization rate of 10.3 %. The DCF model also used prospective financial information. For purposes of the impairment test, the Company’s financial plans for the remainder of 2020 through 2024 were updated for the projected impact of COVID-19 on the net revenue growth and asset utilization. Estimating future earnings and capital requirements involves judgment and the consideration of past and current performance and overall macroeconomic and regulatory environments.
The market approach uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities. The fair value measure is based on the value that those transactions indicate. Under the market approach, we utilized Level 1 and 2 inputs when measuring fair value. In the application of the market approach, the GPC method of appraisal is based on the premise that pricing multiples of publicly traded companies can be used as a tool to be applied in valuing a closely held entity. A value multiple or ratio relates a stock’s market price to the reported accounting data such as revenue, earnings, and book value. These ratios provide an objective basis for measuring the market’s perception of a stock’s fair value. Value ratios generally reflect the trends in growth, performance and stability of the financial results of operations. In this way, the business and financial risks exhibited by an industry or group of companies can be viewed in relation to market values. Value ratios also reflect the market’s outlook for the economy as a whole. Guideline companies provide a reasonable basis for comparison to the relative investment characteristics of the company being valued. Utilizing publicly traded companies located in Pennsylvania and surrounding states with assets between $1.0 billion and $2.5 billion and return on assets greater than 0.5%, we analyzed the relationships between the guideline companies' asset size, profitability, asset quality and capital ratios and applied a control premium of 34 % to the selected guideline company multiples. The control premium is management's estimate of how much a market participant would be willing to pay over the fair market value in consideration of synergies and other benefits that flow from control of the entity.
We also considered the GPC method using trading activity of publicly traded companies that are most similar to the Company. While the banking industry typically has a sufficient level of mergers and acquisitions activity to rely on this method under the market approach, there have only been seven transactions involving target institutions with assets greater than $1 billion announced since March 1, 2020 (post-COVID). Of these, only two have closed. Therefore, we were unable to rely on this method in our analysis.
We then placed equal consideration on the results of the income and market approaches to determine the concluded fair value of the reporting unit. The weighting is judgmental and is based on the perceived level of appropriateness of the valuation methodology. Estimating the fair value involves the use of estimates and significant judgments that are based on a number of factors including actual operating results. If current conditions change from those expected, it is reasonably possible that the judgments and estimates described above could change in future periods and require management to further evaluate goodwill for impairment.
As a result of the goodwill impairment test and in connection with the preparation of the consolidated financial statements included in this Quarterly Report on Form 10-Q, the Company concluded that goodwill was impaired. Accordingly, the Company recorded a goodwill impairment charge of $ 18.7 million for the three and nine months ended September 30, 2020 as our estimated fair value was less than our book value. This was a non-cash charge to earnings and had no impact on regulatory capital, cash flows or liquidity position. No goodwill impairment charge was recognized for the three and nine months ended September 30, 2019.
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The following table presents the changes in the Company's carrying amount of goodwill for the period indicated.
Amount
(Dollars in thousands)
December 31, 2019 $ 28,425
Goodwill Impairment ( 18,693 )
September 30, 2020 $ 9,732
Intangible Assets
Intangible assets with definite lives are amortized over their respective estimated useful lives. The amortization expense represents the estimated decline in value of the underlying asset. The following table presents a summary of intangible assets subject to amortization at the dates indicated.
September 30, 2020 December 31, 2019
Gross Carrying Amount Accumulated Amortization Net Carrying Value Gross Carrying Amount Accumulated Amortization Net Carrying Value
(Dollars in thousands)
Core Deposit Intangible $ 14,103 $ ( 6,562 ) $ 7,541 $ 14,103 $ ( 5,108 ) $ 8,995
Customer List 1,800 ( 410 ) 1,390 1,800 ( 268 ) 1,532
Total Intangible Assets $ 15,903 $ ( 6,972 ) $ 8,931 $ 15,903 $ ( 5,376 ) $ 10,527
The estimated amortization expense of intangible assets assumes no activities, such as acquisitions, which would result in additional amortizable intangible assets. Estimated amortization expense of intangible assets in subsequent fiscal years is as follows.
Amount
(Dollars in thousands)
Remaining in 2020 $ 532
2021 2,128
2022 2,128
2023 2,128
2024 1,430
2025 and thereafter 585
Total Estimated Intangible Asset Amortization Expense $ 8,931
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Note 14. Stock Based Compensation
The following table presents stock option information for the periods indicated.
Number of Shares Weighted Average Exercise Price Weighted Average Remaining Contractual
Life in Years
Outstanding at December 31, 2019 245,153 $ 24.36 6.5
Granted 15,000 18.60
Exercised ( 20,106 ) 22.69
Forfeited ( 19,776 ) 26.64
Outstanding at September 30, 2020 220,271 $ 23.92 6.1
Exercisable at September 30, 2020 139,548 $ 23.67 5.6
Number of Shares Weighted Average Exercise Price Weighted Average Remaining Service Period in Years
Nonvested at September 30, 2020 80,723 $ 24.36 6.9
Summary of Significant Assumptions for Newly Issued Stock Options
Expected Term in Years 6.5
Expected Volatility 25.8 %
Expected Dividends $ 0.96
Risk Free Rate of Return 0.28 %
The following table presents restricted stock award information for the periods indicated
Number of Shares Weighted Average Grant Date Fair Value Price Weighted Average Remaining Service Period in Years
Nonvested at December 31, 2019 48,030 $ 28.83 8.1
Granted 5,000 18.60
Vested ( 600 ) 25.08
Forfeited ( 3,300 ) 29.23
Nonvested at September 30, 2020 49,130 $ 27.81 7.6
The Company recognizes expense over a five -year vesting period for the restricted stock awards and stock options. Stock-based compensation expense related to restricted stock awards and stock options was $ 114,000 and $ 78,000 for the three months ended September 30, 2020 and 2019, respectively and $ 370,000 and $ 232,000 for the nine months ended September 30, 2020 and 2019, respectively.
As of September 30, 2020 and December 31, 2019, total unrecognized compensation expense was $ 195,000 and $ 363,000 , respectively, related to stock options, and $ 1.1 million and $ 1.4 million, respectively, related to restricted stock awards.
Intrinsic value represents the amount by which the fair value of the underlying stock at September 30, 2020 and December 31, 2019 exceeds the exercise price of the stock options. The intrinsic value of stock options was $ 7,200 and $ 1.4 million at September 30, 2020 and December 31, 2019, respectively.
At September 30, 2020 and December 31, 2019, respectively, there were 18,135 and 13,359 shares available under the Plan to be issued in connection with the exercise of stock options, and 58,424 and 60,124 shares that may be issued as restricted stock awards or units. Restricted stock awards or units may be issued above this amount provided that the number of shares reserved for stock options is reduced by three shares for each restricted stock award or unit share granted.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion should be read in conjunction with the unaudited consolidated financial statements, notes and tables included in this report. For further information, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Forward-Looking Statements
This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, but rather statements based on the Company’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include, but are not limited to, the following:
• General and local economic conditions;
• The scope and duration of economic contraction as a result of the COVID-19 pandemic and its effects on the Company’s business and that of the Company’s customers;
• Changes in market interest rates, deposit flows, demand for loans, real estate values and competition;
• Competitive products and pricing;
• The ability of our customers to make scheduled loan payments;
• Loan delinquency rates and trends;
• Our ability to manage the risks involved in our business;
• Our ability to integrate the operations of businesses we acquire;
• Our ability to control costs and expenses;
• Inflation, market and monetary fluctuations;
• Changes in federal and state legislation and regulation applicable to our business;
• Actions by our competitors; and
• Other factors disclosed in the Company’s periodic reports as filed with the Securities and Exchange Commission.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.
Given the numerous unknowns and risks that are heavily weighted to the downside due to COVID-19, our forward-looking statements are subject to the risk that conditions will be substantially different than we currently expect. If efforts to contain COVID-19 are unsuccessful and government restriction last longer than expected, the recession would be much longer and much more severe and damaging. Ineffective fiscal stimulus, or an extended delay in implementing it, are also major risks. The deeper the recession and the longer it lasts, the more it will damage consumer fundamentals and sentiment. This could both prolong the recession and make any recovery weaker. Similarly, the recession could damage business fundamentals. As a result, the outbreak and its consequences, including responsive measures to manage it, have had and are likely to continue to have an adverse effect, possibly materially, on our business and financial performance by adversely affecting, possibly materially, the demand and profitability of our products and services, the valuation of assets and our ability to meet the needs of our customers.
The ability to predict the impact of the COVID-19 pandemic on the Company’s future operating results with any precision is difficult and depends on many factors beyond our control. The Company's market area was impacted by state-wide shelter-in-place orders and closing all but essential businesses. Certain government restrictions remaining in effect. The far-reaching consequences of these actions and the crisis is unknown and will largely depend on the extent and length of the recession combined with how quickly the economy can re-open. For example:
• While specific actions have been taken to protect employees through work-at-home arrangements and social distancing measures for those working in our offices, outbreak among employees could result in closure of branches or back office operations for quarantine purposes and result in the unavailability of key employees and disruption of services provided to customers.
• The lack of economic activity may curtail lending opportunities, especially from a commercial perspective, and impact our customers involved in vulnerable industries such as hospitality, retail, office space, senior housing, oil and gas, and restaurants.
• Forbearance activity and any additional forbearance that may be needed could impact cash flows and liquidity.
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• Delinquencies, nonperforming loans, charge-offs and the related provision for loan losses, and foreclosures may significantly increase after forbearance period ends, if economic stimulus does not have the intended outcome, and/or if the economy does not fully re-open allowing people to return to work.
• A sustained economic downturn may result in a decrease in the Company’s value and result in potential material impairment to its intangible assets, and/or long-lived assets or additional impairment to goodwill.
• The Federal Reserve Board’s decision to drop the benchmark interest rate from a range of 1.5% to 1.75% to start the year to a range of 0% to 0.25% as part of a wide-ranging emergency action to protect the economy from the COVID-19 outbreak may result in an influx of loan refinances that could impact the Company’s net interest income.
• The lack of economic activity may negatively impact our noninterest income through less fee activity, such as from customer debit card swipes for purchases.
• Insurance commissions may decline because workers compensation policies are mainly determined based on payroll figures, which could decrease due to job loss.
The Company assumes no obligation to update any forward-looking statements except as may be required by applicable law or regulation.
General
CB Financial Services, Inc. is a bank holding company established in 2006 and headquartered in Carmichaels, Pennsylvania. CB Financial’s business activity is conducted primarily through its wholly owned bank subsidiary, Community Bank.
The Bank is a Pennsylvania-chartered commercial bank headquartered in Carmichaels, Pennsylvania. The Bank operates from 15 offices in Greene, Allegheny, Washington, Fayette and Westmoreland Counties in southwestern Pennsylvania, six offices in Brooke, Marshall, Ohio, Upshur and Wetzel Counties in West Virginia, and one office in Belmont County in Ohio. On September 30, 2020, the Bank completed the closure of the Monessen office in Westmoreland County, Pennsylvania and the Bethlehem office in Ohio County, West Virginia reducing the total number of branches to 22. The Bank also has two loan production offices in Fayette and Allegheny County, a corporate center in Washington County and an operations center in Greene County in Pennsylvania. The Bank is a community-oriented institution offering residential and commercial real estate loans, commercial and industrial loans, and consumer loans as well as a variety of deposit products for individuals and businesses in its market area. Property and casualty, commercial liability, surety and other insurance products are offered through Exchange Underwriters, Inc., the Bank’s wholly owned subsidiary that is a full-service, independent insurance agency located in the Washington County.
Overview
The following discussion and analysis is presented to assist in the understanding and evaluation of our consolidated financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q and should be read in conjunction therewith. The detailed discussion focuses on our consolidated financial condition as of September 30, 2020, compared to the financial condition as of December 31, 2019 and the consolidated results of operations for the three and nine months ended September 30, 2020 compared to the three and nine month ended September 30, 2019.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income consists primarily of fees and service charges on deposit accounts, insurance commissions, income from bank-owned life insurance and other income. Noninterest expense consists primarily of expenses related to salaries and employee benefits, occupancy and equipment, data processing, contracted services, legal and professional fees, advertising, deposit and general insurance and other expenses.
Financial institutions like us, in general, are significantly affected by economic conditions, competition, and the monetary and fiscal policies of the federal government. Lending activities are influenced by the demand for and supply of housing, competition among lenders, interest rate conditions, and funds availability. Our operations and lending are principally concentrated in southwestern Pennsylvania and Ohio Valley market areas.
Critical Accounting Estimates
Goodwill. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Deemed to have an indefinite life and not subject to amortization, goodwill is instead tested for impairment at the reporting unit level at least annually on October 31 or more frequently if triggering events occur or impairment indicators exist. The Company operates two reporting units – Community Banking segment and Insurance Brokerage Services segment. The Company has assigned 100% of the goodwill to the Community Banking reporting unit.
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In 2019, the Company adopted ASU 2017-04 whereby the Company applies a one-step quantitative test and records the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a step one impairment test is unnecessary. An entity also has the option to bypass the qualitative assessment for any reporting unit and proceed directly to the first step of impairment testing.
The COVID-19 pandemic that has impacted the U.S. and most of the world along with government response to curtail the spread of the virus beginning in March 2020 has significantly impacted our market area. These restrictions have resulted in significant adverse effects on macroeconomic conditions, and stock market valuations have decreased substantially for most companies in the banking sector, including our Company. In light of the adverse circumstances resulting from COVID-19, management determined it was necessary to evaluate goodwill for impairment.
Determining the fair value of a reporting unit under a quantitative goodwill impairment test is judgmental and involves the use of significant estimates and assumptions. The methodology used to assess impairment was a combination of the income approach (i.e. discounted cash flow (“DCF”) method) and the market approach (i.e. Guideline Public Company ("GPC") method) to determine the fair value.
In the application of the income approach, the Company determined the fair value of the reporting unit using a DCF analysis. The income approach uses valuation techniques to convert future earnings or cash flows to present value to arrive at a value that is indicated by market expectations about future amounts. The income approach relies on Level 3 inputs along with a market-derived cost of capital when measuring fair value. Fair value is determined by converting anticipated benefits into a present single value. Once the benefit or benefits are selected, an appropriate discount or capitalization rate is applied to each benefit. These rates are calculated using the appropriate measure for the size and type of company, using financial models and market data as required. The discount rate was derived based on the modified capital asset pricing model. The discount rate applied is comprised of a risk-free rate of return, an equity risk premium, a size premium and a factor covering the systemic market risk and a company specific risk premium. The values for the factors applied are determined primarily using external sources of information. The discount rate was estimated at 13.3%. Using the discount rate derived from the above components, we subtracted an expected sustainable long-term growth estimate of 3.0% given expected growth in the geographic market and the overall long-term economy to arrive at a capitalization rate of 10.3%. The DCF model also used prospective financial information. For purposes of the impairment test, the Company’s financial plans for the remainder of 2020 through 2024 were updated for the projected impact of COVID-19 on the net revenue growth and asset utilization. Estimating future earnings and capital requirements involves judgment and the consideration of past and current performance and overall macroeconomic and regulatory environments.
The market approach uses observable prices and other relevant information that is generated by market transactions involving identical or comparable assets or liabilities. The fair value measure is based on the value that those transactions indicate. Under the market approach, we utilized Level 1 and 2 inputs when measuring fair value. In the application of the market approach, the GPC method of appraisal is based on the premise that pricing multiples of publicly traded companies can be used as a tool to be applied in valuing a closely held entity. A value multiple or ratio relates a stock’s market price to the reported accounting data such as revenue, earnings, and book value. These ratios provide an objective basis for measuring the market’s perception of a stock’s fair value. Value ratios generally reflect the trends in growth, performance and stability of the financial results of operations. In this way, the business and financial risks exhibited by an industry or group of companies can be viewed in relation to market values. Value ratios also reflect the market’s outlook for the economy as a whole. Guideline companies provide a reasonable basis for comparison to the relative investment characteristics of the company being valued. Utilizing publicly traded companies located in Pennsylvania and surrounding states with assets between $1.0 billion and $2.5 billion and return on assets greater than 0.5%, we analyzed the relationships between the guideline companies' asset size, profitability, asset quality and capital ratios and applied a control premium of 34% to the selected guideline company multiples. The control premium is management's estimate of how much a market participant would be willing to pay over the fair market value in consideration of synergies and other benefits that flow from control of the entity.
We also considered the GPC method using trading activity of publicly traded companies that are most similar to the Company. While the banking industry typically has a sufficient level of mergers and acquisitions activity to rely on this method under the market approach, there have only been seven transactions involving target institutions with assets greater than $1 billion announced since March 1, 2020 (post-COVID). Of these, only two have closed. Therefore, we were unable to rely on this method in our analysis.
We then placed equal consideration on the results of the income and market approaches to determine the concluded fair value of the reporting unit. The weighting is judgmental and is based on the perceived level of appropriateness of the valuation methodology. Estimating the fair value involves the use of estimates and significant judgments that are based on a number of
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factors including actual operating results. If current conditions change from those expected, it is reasonably possible that the judgments and estimates described above could change in future periods and require management to further evaluate goodwill for impairment.
As a result of the goodwill impairment test, and in connection with the preparation of the consolidated financial statements included in this Quarterly Report on Form 10-Q, the Company concluded that goodwill was impaired. Accordingly, the Company recorded a goodwill impairment charge of $18.7 million for the three and nine months ended September 30, 2020 as our estimated fair value was less than our book value. This was a non-cash charge to earnings and had no impact on regulatory capital, cash flows or liquidity position. No goodwill impairment charge was recognized for the three and nine months ended September 30, 2019.
Explanation of Use of Non-GAAP Financial Measures
In addition to financial measures presented in accordance with generally accepted accounting principles (“GAAP”), we present certain non-GAAP financial measures. We believe these non-GAAP financial measures provide useful information in understanding our underlying results of operations or financial position and our business and performance trends as they facilitate comparisons with the performance of other companies in the financial services industry. Although we believe that these non-GAAP financial measures enhance the understanding of our business and performance, they should not be considered an alternative to GAAP financial measures or considered to be more important than financial results determined in accordance with GAAP, nor are they necessarily comparable with non-GAAP measures which may be presented by other companies. Where non-GAAP financial measures are used, the comparable GAAP financial measure, as well as the reconciliation to the comparable GAAP financial measure, can be found herein.
The interest income on interest-earning assets, net interest rate spread and net interest margin are presented on a fully tax-equivalent (“FTE”) basis. The FTE basis adjusts for the tax benefit of income on certain tax-exempt loans and securities using the federal statutory income tax rate of 21 percent. We believe the presentation of net interest income on a FTE basis ensures comparability of net interest income arising from both taxable and tax-exempt sources and is consistent with industry practice.
The following table reconciles net interest income, net interest spread and net interest margin on a FTE basis for the periods indicated:
Three Months Ended
Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(Dollars in thousands)
Interest Income per Consolidated Statement of (Loss) Income (GAAP) $ 11,656 $ 13,098 $ 35,712 $ 38,063
Adjustment to FTE Basis
53 56 165 203
Interest Income (FTE) (Non-GAAP)
11,709 13,154 35,877 38,266
Interest Expense per Consolidated Statement of (Loss) Income 1,240 2,002 4,442 5,828
Net Interest Income (FTE) (Non-GAAP)
$ 10,469 $ 11,152 $ 31,435 $ 32,438
Net Interest Rate Spread (GAAP)
3.03 % 3.50 % 3.15 % 3.42 %
Adjustment to FTE Basis
0.02 0.02 0.02 0.03
Net Interest Rate Spread (FTE) (Non-GAAP)
3.05 3.52 3.17 3.45
Net Interest Margin (GAAP)
3.19 % 3.72 % 3.34 % 3.64 %
Adjustment to FTE Basis
0.02 0.02 0.01 0.03
Net Interest Margin (FTE) (Non-GAAP)
3.21 3.74 3.35 3.67
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Allowance for loan losses to total loans, excluding PPP loans, is a non-GAAP measure that serves as a useful measurement to evaluate the allowance for loan losses without the impact of SBA guaranteed loans.
September 30, 2020 December 31, 2019
(Dollars in thousands)
Allowance for Loan Losses $ 13,780 $ 9,867
Total Loans 1,050,885 $ 952,496
PPP Loans (71,028) —
Total Loans, Excluding PPP Loans (Non-GAAP) $ 979,857 $ 952,496
Allowance for Loan Losses to Total Loans (GAAP) 1.31 % 1.04 %
Allowance for Loan Losses to Total Loans, Excluding PPP Loans (Non-GAAP) 1.41 % 1.04 %
Tangible book value per common share is a non-GAAP measure and is calculated based on tangible common equity divided by period-end common shares outstanding. We believe this non-GAAP measure serves as a useful tool to help evaluate the strength and discipline of the Company's capital management strategies and as an additional, conservative measure of the Company’s total value.
September 30, 2020 December 31, 2019
(Dollars in thousands, except share and per share data)
Stockholders' Equity (GAAP) $ 133,299 $ 151,097
Goodwill and Other Intangible Assets, Net (18,663) (38,952)
Tangible Common Equity or Tangible Book Value (Non-GAAP) $ 114,636 $ 112,145
Common Shares Outstanding 5,398,712 5,463,828
Book Value per Common Share (GAAP) $ 24.69 $ 27.65
Tangible Book Value per Common Share (Non-GAAP) $ 21.23 $ 20.52

Consolidated Statement of Financial Condition Analysis
Assets. Total assets increased $71.3 million, or 5.4%, to $1.39 billion at September 30, 2020, compared to $1.32 billion at December 31, 2019.
• Cash and due from banks increased $32.0 million, or 39.9%, to $112.2 million at September 30, 2020, compared to $80.2 million at December 31, 2019. This is primarily the result of investment security call and paydown activity.
• Investment securities classified as available-for-sale decreased $38.4 million, or 19.5%, to $159.0 million at September 30, 2020, compared to $197.4 million at December 31, 2019. This was primarily the result of $59.5 million of calls of U.S. government agency and municipal securities due to the market interest rate decreases that occurred in light of the COVID-19 pandemic and $31.7 million of paydowns on mortgage-backed securities. In addition, there was the purchase of $68.9 million of mortgage-backed and U.S. government agency securities partially offset by $17.9 million of mortgage-backed security sales to recognize gains on higher-interest securities that were paying down quicker than expected. In addition, there was a $1.8 million increase in the market value of the debt securities portfolio attributed to market interest rate decreases and $469,000 loss in market value in the marketable equity securities portfolio, which is primarily comprised of bank stocks.
• Total loans increased $98.4 million to $1.05 billion at September 30, 2020 and represented a 13.7% annualized growth. Year-to-date loan growth was primarily due to originating 638 PPP loans totaling $71.0 million, mainly in the second quarter, which included $2.2 million in net origination fees. Excluding the impact of PPP, organic loan growth was $27.4 million and represented an annualized growth rate of 3.8% as of September 30, 2020. Additional loan growth was experienced through net funding of $33.6 million in construction loans. Average loans for the three months ended September 30, 2020 increased $21.4 million compared to the three months ended June 30, 2020 and was primarily driven by the full quarter impact on average balances from PPP loans. In October 2020, the SBA began processing loan
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forgiveness. $1.7 million of origination fees are unearned as of September 30, 2020 and expected to be earned upon receipt of funds from the SBA for forgiveness.
• The allowance for loan losses was $13.8 million at September 30, 2020 compared to $9.9 million at December 31, 2019. This reflects a $4.0 million provision for loan loss due to an increase in impaired loans with specific reserves and net increase in qualitative factors related to economic and industry conditions to account for the adverse economic impact of COVID-19. As a result, the allowance for loan losses to total loans increased from 1.04% at December 31, 2019 to 1.31% at September 30, 2020. No allowance was allocated to the PPP loan portfolio due to the Bank complying with the lender obligations that ensure SBA guarantee. The allowance for loan losses to total loans, excluding PPP loans, was 1.41% at September 30, 2020.
Nonperforming loans increased to $15.0 million from $5.4 million at December 31, 2019 and, coupled with loan growth noted previously, resulted in the nonperforming loans to total loans ratio increase to 1.43% at September 30, 2020 compared to 0.57% at December 31, 2019. Nonaccrual loans increased primarily as a result of two hotels with a total principal balance of $7.9 million that were determined to be impaired due to insufficient cash flows and occupancy rates and one commercial and industrial relationship totaling $1.4 million downgraded to substandard.
• The Bank provided borrower support and relief through short-term loan forbearance options by primarily allowing: (a) deferral of three months of payments; or (b) for consumer loans not secured by a real estate mortgage, three months of interest-only payments that also extends the maturity date of the loan by three months. In certain circumstances, a second three-month deferral period was granted.
The following table provides details of loans in forbearance at the dates indicated.
September 30, 2020 June 30, 2020
Number
of
Loans 		Amount % of Portfolio Number
of
Loans 		Amount % of Portfolio
(Dollars in thousands)
Real Estate:
Residential 11 1,242 0.4 % 163 23,653 6.9 %
Commercial 9 13,885 3.9 % 111 105,117 30.0 %
Construction 1 7,162 10.4 % 6 15,518 26.6 %
Commercial and Industrial 1 122 0.1 % 76 15,697 10.5 %
Consumer 12 295 0.3 % 170 3,447 2.9 %
Other — — — % 1 2,504 11.2 %
Total Loans in Forbearance 34 $ 22,706 2.2 % 527 $ 165,936 15.9 %
The commercial real estate loans remaining in deferral at September 30, 2020 include five hotel loans totaling $10.3 million, and the construction loan is a retail project. These six loans are scheduled to exit their deferral period in the fourth quarter. The following table sets forth details at September 30, 2020 of industries considered at higher risk to be negatively impacted by the COVID-19 pandemic:
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Industry Forbearance
Weighted
Average
Risk
Rating (1)
Industry
Amount 		As a
Percent
of Total
Risk
Based
Capital 		As a
Percent
of Loan
Class 		Number
of
Loans
Weighted
Average
Risk
Rating (1)
Forbearance
Amount 		As a
Percent
of
Industry
(Dollars in thousands)
Commercial Real Estate - Owner Occupied:
Retail 3.6 $ 27,109 23.0 % 7.7 % — — $ — — %
Commercial Real Estate - Nonowner Occupied:
Retail 3.7 56,185 47.6 15.9 — — — —
Hotels 5.3 24,995 21.2 7.1 5 5.4 10,327 41.3
Construction - Commercial Real Estate:
Retail 4.0 7,992 6.8 11.6 1 4.0 7,162 89.6
Hotels 4.3 5,327 4.5 7.7 — — — —
Total:
Retail 3.7 91,286 77.4 1 4.0 7,162
Hotels 5.1 30,322 25.7 5 5.4 10,327
(1) Loan risk rating of 1-4 is considered a pass-rated credit, 5 is special mention, 6 is substandard, 7 is doubtful and 8 is loss.

Liabilities. Total liabilities increased $89.1 million, or 7.6%, to $1.26 billion at September 30, 2020 compared to $1.17 billion at December 31, 2019.
• Deposits benefited from PPP loan origination and to a lesser extent government stimulus payments and increased $80.7 million, or 7.2%, to $1.20 billion as of September 30, 2020 compared to $1.12 billion at December 31, 2019.Noninterest bearing demand deposits and savings accounts increased $68.1 million and $15.8 million, respectively, partially offset by a decrease of $23.5 million in time deposits.
The impact of the PPP loans that were originated and the proceeds of which were subsequently deposited at the Bank was approximately $54.8 million. Annualized deposit growth rate was 9.6% including PPP loan deposits and 3.1% without PPP loan deposits, representing organic deposit growth.
• Short-term borrowings increased $11.5 million, or 37.6%, to $42.1 million at September 30, 2020, compared to $30.6 million at December 31, 2019. At September 30, 2020 and December 31, 2019, short-term borrowings were comprised entirely of securities sold under agreements to repurchase. The increase is related to business deposit customers whose funds, above designated target balances, are transferred into an overnight interest-earning investment account by purchasing securities from the Bank’s investment portfolio under an agreement to repurchase.
• Other borrowed funds decreased $3.0 million due to a FHLB borrowing that matured in the current period.
Stockholders’ Equity. Stockholders’ equity decreased $17.8 million, or 11.8%, to $133.3 million at September 30, 2020, compared to $151.1 million at December 31, 2019.
• Net loss was $13.7 million for the nine months ended September 30, 2020.
• Accumulated other comprehensive income increased $1.4 million primarily due to market interest rate conditions in the current period on the Bank’s available-for-sale debt securities.
• The Company paid $3.9 million in dividends to common stockholders in the current year.
• As part of the Company’s stock repurchase program, the Company repurchased 67,816 shares of common stock totaling $1.9 million in the current year. COVID-19 prompted the Company to announce on March 19, 2020 that the stock repurchase program was suspended until further notice to preserve excess capital in support of the Bank’s business of providing financial services to its customers and communities.
• Book value per share was $24.69 at September 30, 2020 compared to $27.65 at December 31, 2019, a decrease of $2.96 primarily due to goodwill impairment. Tangible book value per share increased $0.71, or 3.5%, to $21.23 compared to $20.52 at December 31, 2019.
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Consolidated Results of Operations
Quarterly and year-to-date results were impacted by the following:
• The Company conducted a goodwill impairment analysis during the most recent quarter. The Company had goodwill of $28.4 million at December 31, 2019, which was primarily related to past bank mergers and is 100% attributable to the community banking segment. Due to the macroeconomic impacts of the pandemic and the overall industry-wide decline in value of stocks and earnings expectations in the banking sector, including the Company's stock, the Company determined its goodwill was no longer supported by its estimate of the Company’s fair value. Therefore, $18.7 million of goodwill was deemed impaired and written off for the three and nine months ended September 30, 2020, reducing goodwill to $9.7 million at September 30, 2020. This non-cash expense was deemed non-core and has no impact on tangible equity, cash flows, liquidity or regulatory capital.
• The Company incurred a non-cash impairment of fixed assets of $884,000 as a result of the previously announced Monessen branch closure. Given the change in business purpose of the bank owned location, an appraisal was obtained to determine the property value and, as a result, the property was written down to fair value. The impairment charge primarily relates to write off of the unamortized purchase accounting adjustment associated with the branch, which was the former headquarters of FedFirst Financial Corporation acquired through merger in 2014. In addition, there was a one-time $84,000 early lease termination payment from the Bethlehem branch closure. The Company expects accretive annual earnings of approximately $678,000 from the branch consolidations.
Consolidated Results of Operations for the Three Months Ended September 30, 2020 and 2019
Overview. Net loss was $17.4 million for the three months ended September 30, 2020, a decrease of $21.1 million compared to net income of $3.7 million for the three months ended September 30, 2019. Excluding the impact of goodwill impairment and impairment of fixed assets in the current period, net income decreased $1.9 million, or 50.8%, to $1.8 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.
Net Interest Income.
Net interest income decreased $680,000, or 6.1%, to $10.4 million for the three months ended September 30, 2020 compared to $11.1 million for the three months ended September 30, 2019.
• Interest and dividend income decreased $1.4 million, or 11.0%, to $11.7 million for the three months ended September 30, 2020 compared to $13.1 million the three months ended September 30, 2019.
◦ Interest income on loans decreased $275,000, or 2.5%, $10.7 million for the three months ended September 30, 2020 compared to $11.0 million for the three months ended September 30, 2019. Although average loans increased $115.4 million compared to the three months ended September 30, 2019, the average yield decreased 62 basis points (“bps”) to 4.13%. The current quarter loan yield compared to the quarter ended September 30, 2019 was impacted by the declines in interest rate indices in the first quarter of 2020 at the onset of the COVID-19 pandemic and the full quarter impact of Paycheck Protection Program (“PPP”) loans, which decreased loan yield approximately 11 bps. Approximately $274,000 of net loan origination fees were recognized in the current quarter. In addition, the Bank continued to accrue and recognize interest income on loans in forbearance due to expectation that borrowers will resume payment at the end of forbearance and collectibility of the interest income is not in question. However, two hotel loans were placed on nonaccrual in the current quarter which resulted in reversal of $231,000 of previously accrued interest income while the loans were in deferral.
◦ The impact of the accretion of the credit mark on acquired loan portfolios was $127,000 for the three months ended September 30, 2020 compared to $65,000 for the three months ended September 30, 2019, or 5 bps in the current period compared to 3 bps in the prior period.
◦ Interest income on taxable investment securities decreased $805,000, or 51.7%, to $753,000 for the three months ended September 30, 2020 compared to $1.6 million for the three months ended September 30, 2019 driven by a $76.1 million decrease in average investment security balance and 69 bps decrease in average yield. The Federal Reserve’s decision to drop the benchmark interest rate resulted in the call of $59.5 million in U.S. government agency and municipal securities in the current year. In addition, there were $31.7 million of paydowns on mortgage-backed securities in the current year. The funds were partially maintained in cash or reinvested in lower rate securities.
◦ Other interest and dividend income, which primarily consists of interest-bearing cash, decreased $309,000, or 76.3% to $96,000 for the three months ended September 30, 2020 compared to $405,000 for the three months ended September 30, 2019. Average other interest-earning assets increased $81.3 million compared to the three months ended September 30, 2020 primarily from buildup of cash as a result of calls of U.S. government agency and
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municipal securities and government stimulus payments, but average yield declined 353 bps due to interest rate cuts on interest-earning cash deposits held at other financial institutions.
• Interest expense decreased $762,000, or 38.1%, to $1.2 million for the three months ended September 30, 2020 compared to $2.0 million for the three months ended September 30, 2019.
◦ Interest expense on deposits decreased $714,000, or 38.3%, to $1.2 million for the three months ended September 30, 2020 compared $1.9 million for the three months ended September 30, 2019. While average interest-earning deposits increased $13.6 million, interest rate declines for all products driven by pandemic-related interest rate cuts and efforts to control pricing resulted in a 34 bp decrease in average cost compared to the three months ended September 30, 2019.
◦ Interest expense on other borrowed funds decreased $29,000, or 31.9%, to $62,000 for the three months ended September 30, 2020 primarily due to FHLB long-term borrowings that matured and were paid off throughout the last year that resulted in a $6.0 million decrease in average balance.

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Average Balances and Yields . The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. FTE yield adjustments have been made for tax exempt loan and securities interest income utilizing a marginal federal income tax rate of 21% for the periods presented. As such, amounts will not agree to income as reported in the consolidated financial statements. Average balances for loans are net of the allowance for loan losses, and include nonaccrual loans with a zero yield. Nonaccrual loans are included in average balances only. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
Three Months Ended September 30,
2020 2019
Average
Balance 		Interest
and
Dividends
Yield/
Cost (4)
Average
Balance 		Interest
and
Dividends
Yield/
Cost (4)
(Dollars in thousands) (Unaudited)
Assets:
Interest-Earning Assets:
Loans, Net $ 1,035,426 $ 10,744 4.13 % $ 920,029 $ 11,015 4.75 %
Debt Securities
Taxable 123,332 753 2.44 199,388 1,558 3.13
Tax Exempt 13,054 97 2.97 19,906 156 3.13
Marketable Equity Securities 2,580 19 2.95 2,538 20 3.15
Other Interest-Earning Assets 123,171 96 0.31 41,863 405 3.84
Total Interest-Earning Assets 1,297,563 11,709 3.59 1,183,724 13,154 4.41
Noninterest-Earning Assets 115,567 135,172
Total Assets $ 1,413,130 $ 1,318,896
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits $ 245,977 99 0.16 % $ 226,887 303 0.53 %
Savings 230,567 32 0.06 216,923 118 0.22
Money Market 185,644 140 0.30 178,485 241 0.54
Time Deposits 198,184 879 1.76 224,483 1,202 2.12
Total Interest-Bearing Deposits 860,372 1,150 0.53 846,778 1,864 0.87
Borrowings 53,512 90 0.67 45,066 138 1.21
Total Interest-Bearing Liabilities 913,884 1,240 0.54 891,844 2,002 0.89
Noninterest-Bearing Demand Deposits 337,441 269,931
Other Liabilities 8,477 9,949
Total Liabilities 1,259,802 1,171,724
Stockholders' Equity 153,328 147,172
Total Liabilities and Stockholders' Equity $ 1,413,130 $ 1,318,896
Net Interest Income (FTE) (Non-GAAP) (5)
$ 10,469 $ 11,152
Net Interest Rate Spread (FTE) (Non-GAAP) (1)(5)
3.05 % 3.52 %
Net Interest-Earning Assets (2)
$ 383,679 $ 291,880
Net Interest Margin (FTE) (Non-GAAP) (3)(5)(
3.21 3.74
Return on Average Assets (4.90) 1.13
Return on Average Equity (4)
(45.13) 10.10
Average Equity to Average Assets 10.85 11.16
Average Interest-Earning Assets to Average Interest-Bearing Liabilities 141.98 132.73
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents annualized net interest income divided by average total interest-earning assets.
(4) Annualized based on three months ended results.
(5) See section entitled "Explanation of Use of Non-GAAP Financial Measures" appearing earlier in this quarterly report.

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Rate/Volume Analysis . The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. FTE yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21%. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns.
Three Months Ended September 30, 2020
Compared to
Three Months Ended September 30, 2019
Increase (Decrease) Due to
Volume Rate Total
(Dollars in thousands) (Unaudited)
Interest and Dividend Income:
Loans, net $ 1,255 $ (1,526) $ (271)
Debt Securities:
Taxable (509) (296) (805)
Exempt From Federal Tax (51) (8) (59)
Marketable Equity Securities — (1) (1)
Other Interest-Earning Assets 293 (602) (309)
Total Interest-Earning Assets 988 (2,433) (1,445)
Interest Expense:
Deposits 22 (736) (714)
Borrowings 21 (69) (48)
Total Interest-Bearing Liabilities 43 (805) (762)
Change in Net Interest Income $ 945 $ (1,628) $ (683)
Provision for Loan Losses. The provision for loan losses was $1.2 million for the three months ended September 30, 2020 compared to $300,000 for the three months ended June 30, 2020 and $175,000 for the three months ended September 30, 2019. The Company has an exposure of hotel loans that have been greatly impacted by the COVID-19 pandemic and were evaluated for impairment in the current quarter. Two hotels with a total principal balance of $7.9 million were determined to be impaired due to insufficient cash flows and occupancy rates and was a driving factor in a $2.3 million increase in specific reserves and current quarter provision. This was partially offset by a reduction in the qualitative factors related to economic trends and industry conditions due to improving macroeconomic conditions as the economy continues to reopen from the second quarter pandemic-related shutdown. In addition, $16.1 million of hotel loans excluded from homogenous loan pools were evaluated for impairment and determined to not require specific reserves.
Net charge-offs for the three months ended September 30, 2020 were $68,000, or 0.03% net charge-offs to average loans on an annualized basis. Net charge-offs were $116,000, or 0.05% to average loans on an annualized basis, for the three months ended September 30, 2019 driven by higher automobile loan charge-offs.
Noninterest Income . Noninterest income increased $207,000, or 10.5%, to $2.2 million for the three months ended September 30, 2020, compared to $2.0 million for the three months ended September 30, 2019.
• Service fees decreased $85,000 to $554,000 for the three months ended September 30, 2020, compared to $639,000 for the three months ended September 30, 2019 due to decrease in overdraft fees and customer usage from the pandemic.
• Insurance commissions increased $94,000 to $1.1 million for the three months ended September 30, 2020 compared to $985,000 for the three months ended September 30, 2019. Insurance commissions decreased $34,000 in the current quarter.
• Net gain on sale of loans was $435,000 in the current period with robust mortgage loan production from refinances in the current quarter compared to $48,000 for the three months ended September 30, 2019.
• The Company recorded a $65,000 net loss on disposal of fixed assets in the current quarter primarily related to the sale of the former Exchange Underwriters headquarters.
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• Other (loss) income included a $71,000 increase in amortization on mortgage servicing rights in the current quarter due to increased prepayment speeds on the serviced mortgage portfolio.
Noninterest Expense. Noninterest expense increased $20.7 million, or 250.8%, to $29.0 million for the three months ended September 30, 2020 compared to $8.3 million for the three months ended September 30, 2019. This was primarily impacted by goodwill impairment of $18.7 million and writedown on fixed assets of $884,000 as previously noted. Excluding the impact of these non-cash charges, noninterest expense increased $1.1 million, or 13.7%, to $9.4 million for the three months ended September 30, 2020 compared to the three months ended September 30, 2019.
• Salaries and employee benefits increased $496,000 to $5.1 million for the three months ended September 30, 2020 compared to $4.6 million for the three months ended September 30, 2019. The increase was primarily due to merit and promotional increases and $113,000 of one-time payments related to the transition and retention of a permanent CEO.
• Occupancy expense increased $162,000 to $759,000 for the three months ended September 30, 2020 compared to $597,000 for the three months ended September 30, 2019. The increase was primarily related to a one-time $84,000 early lease termination payment from the Bethlehem branch closure and increase in property management costs.
• Contracted services increased $219,000 to $531,000 for the three months ended September 30, 2020 compared to $312,000 for the three months ended September 30, 2019 primarily due to temporary employees hired to assist with loan processing and consultants used to assist in infrastructure improvements.
• Data processing increased $112,000 to $482,000 for the three months ended September 30, 2020 compared to $370,000 for the three months ended September 30, 2019 primarily due to technology investments.
• Federal Deposit Insurance Corporation (“FDIC”) assessment expense increased $167,000 to $172,000 for the three months ended September 30, 2020 compared to $5,000 for the three months ended September 30, 2019 due to deposit insurance fund credits approved for banks with less than $10 billion in assets in the prior period.
• Legal fees and professional fees increased $44,000 to $161,000 for the three months ended September 30, 2020 compared to $117,000 for the three months ended September 30, 2019 due to fees associated with the retention of a permanent CEO in the current period.
• Advertising decreased $60,000 to $148,000 for the three months ended September 30, 2020 compared to $208,000 for the three months ended September 30, 2019 due to reduced marketing initiatives during the pandemic.
• Other noninterest expense decreased $65,000 to $919,000 for the three months ended September 30, 2020 compared to $984,000 for the three months ended September 30, 2019 primarily due to decreases in travel-related, meals and telephone costs from employee work-at home arrangements during the pandemic.
Income Tax Expense. Income tax benefit was $184,000 for the three months ended September 30, 2020 a decrease of $1.1 million compared to income tax expense of $884,000 for the three months ended September 30, 2019. While the goodwill impairment charge was non-tax deductible, income tax benefit for the three months ended September 30, 2020 was impacted by a $338,000 benefit related to the reversal of a deferred tax liability associated with goodwill. Due to goodwill being partially impaired, a proportional amount of the deferred tax liability was reversed.
Results of Operations for the Nine Months Ended September 30, 2020 and 2019
Overview. Net loss was $13.7 million for the nine months ended September 30, 2020, a decrease of $23.4 million compared to net income of $9.7 million for the nine months ended September 30, 2019. Excluding the impact of goodwill impairment and impairment of fixed assets in the current period, net income decreased $4.1 million, or 42.8%, to $5.5 million for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.
Net Interest Income. Net interest income decreased $965,000, or 3.0% to $31.3 million for the nine months ended September 30, 2020 compared to $32.2 million for the nine months ended September 30, 2019.
• Interest and dividend income decreased $2.4 million, or 6.2%, to $35.7 million for the nine months ended September 30, 2020 compared to $38.1 million for the nine months ended September 30, 2019.
◦ Although average loans increased $92.0 million, primarily driven by PPP and mortgage loans, the loan yield for the nine months ended September 30, 2020 decreased 45 bps compared to the nine months ended September 30, 2019. The current period loan yield was significantly impacted by the 150 bp decline in the Wall Street Journal Prime Rate in March 2020, which resulted in immediate decrease in interest rates on adjustable rate loans linked to that index. In addition, PPP loans decreased the loan yield approximately 7 bps in the current year. Approximately $465,000 of net loan origination fees were recognized in the current period.
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◦ The impact of the accretion of the credit mark on acquired loan portfolios was $293,000 for the nine months ended September 30, 2020 compared to $203,000 for the nine months ended September 30, 2019, or 4 bps in the current period compared to 3 bps in the prior period.
◦ Interest income on taxable investment securities decreased $1.4 million, or 33.0%, to $2.9 million for the nine months ended September 30, 2020 compared to $4.3 million for the nine months ended September 30, 2019 driven by a $60.0 million decrease in average investment securities primarily from significant calls of U.S. government agency securities and paydowns on mortgage-backed securities in a declining interest rate environment, which were replaced with lower-yielding securities. Current period yield benefited from approximately $231,000 in discount accretion from U.S. government agency calls.
◦ Interest from other interest-earning assets, which primarily consists of interest-earning cash, decreased $679,000, or 61.9% for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 even though average balances increased $48.0 million primarily related to funds received from investment security activity. The impact on interest income was primarily due to declines on interest rates earned on deposits at other financial institutions, which resulted in a 253 bp decrease in yield.
• Interest expense decreased $1.4 million, or 23.8%, to $4.4 million for the nine months ended September 30, 2020 compared to $5.8 million for the nine months ended September 30, 2019.
◦ Interest expense on deposits decreased $1.3 million, or 23.5%, to $4.1 million for the nine months ended September 30, 2020 compared to $5.4 million for the nine months ended September 30, 2019. While average interest-bearing deposits increased $15.2 million, interest rate declines for all products driven by pandemic-related interest rate cuts and efforts to control pricing resulted in a 21 bp decrease in average cost compared to the nine months ended September 30, 2019.
◦ Interest expense on other borrowed funds decreased $84,000, 30.2%, to $194,000 for the nine months ended September 30, 2020 compared to $278,000 for the nine months ended September 30, 2019 primarily due to FHLB long-term borrowings that matured and were paid off throughout the last year that resulted in a $6.0 million decrease in average balance.

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Average Balances and Yields. The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. Average balances are derived from daily balances over the periods indicated. The yields set forth below include the effect of deferred fees, discounts, and premiums that are amortized or accreted to interest income or interest expense. FTE yield adjustments have been made for tax exempt loan and securities interest income utilizing a marginal federal income tax rate of 21% for the periods presented. As such, amounts will not agree to income as reported in the consolidated financial statements. Average balances for loans are net of the allowance for loan losses, and include nonaccrual loans with a zero yield. Nonaccrual loans are included in average balances only. The yields and costs for the periods indicated are derived by dividing annualized income or expense by the average balances of assets or liabilities, respectively, for the periods presented.
Nine Months Ended September 30,
2020 2019
Average
Balance 		Interest
and
Dividends
Yield/
Cost (4)
Average
Balance 		Interest
and
Dividends
Yield/
Cost (4)
(Dollars in thousands) (Unaudited)
Assets:
Interest-Earning Assets:
Loans, Net $ 1,000,157 $ 32,152 4.29 % $ 908,198 $ 32,189 4.74 %
Debt Securities
Taxable 139,691 2,894 2.76 199,689 4,317 2.88
Tax Exempt 14,660 354 3.22 25,343 603 3.17
Marketable Equity Securities 2,575 59 3.06 2,524 60 3.17
Other Interest-Earning Assets 95,040 418 0.59 47,004 1,097 3.12
Total Interest-Earning Assets 1,252,123 35,877 3.83 1,182,758 38,266 4.33
Noninterest-Earning Assets 114,271 120,291
Total Assets $ 1,366,394 $ 1,303,049
Liabilities and Stockholders' Equity:
Interest-Bearing Liabilities:
Interest-Bearing Demand Deposits $ 236,293 506 0.29 % $ 218,812 872 0.53 %
Savings 225,473 156 0.09 215,835 413 0.26
Money Market 183,103 576 0.42 180,494 778 0.58
Time Deposits 206,463 2,898 1.87 220,993 3,344 2.02
Total Interest-Bearing Deposits 851,332 4,136 0.65 836,134 5,407 0.86
Borrowings 47,514 306 0.86 47,887 421 1.18
Total Interest-Bearing Liabilities 898,846 4,442 0.66 884,021 5,828 0.88
Noninterest-Bearing Demand Deposits 305,677 266,105
Other Liabilities 9,025 9,601
Total Liabilities 1,213,548 1,159,727
Stockholders' Equity 152,846 143,322
Total Liabilities and Stockholders' Equity $ 1,366,394 $ 1,303,049
Net Interest Income (FTE) (Non-GAAP) (5)
$ 31,435 $ 32,438
Net Interest Rate Spread (FTE) (Non-GAAP) (1)(5)(
3.17 % 3.45 %
Net Interest-Earning Assets (2)
$ 353,277 $ 298,737
Net Interest Margin (FTE) (Non-GAAP) (3)(5)
3.35 3.67
Return on Average Assets (1.34) 0.99
Return on Average Equity (11.99) 9.00
Average Equity to Average Assets 11.19 11.00
Average Interest-Earning Assets to Average Interest-Bearing Liabilities 139.30 133.79
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents annualized net interest income divided by average total interest-earning assets.
(4) Annualized based on nine months ended results.
(5) See section entitled "Explanation of Use of Non-GAAP Financial Measures" appearing earlier in this quarterly report.
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Rate Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. FTE yield adjustments have been made for tax exempt loan and securities income utilizing a marginal federal income tax rate of 21%. The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume. The total column represents the sum of the prior columns.
Nine Months Ended September 30, 2020
Compared to
Nine Months Ended September 30, 2019
Increase (Decrease) Due to
Volume Rate Total
(Dollars in thousands) (Unaudited)
Interest and Dividend Income:
Loans, net $ 3,173 $ (3,210) $ (37)
Debt Securities:
Taxable (1,250) (173) (1,423)
Exempt From Federal Tax (259) 10 (249)
Marketable Equity Securities 1 (2) (1)
Other Interest-Earning Assets 614 (1,293) (679)
Total Interest-Earning Assets 2,279 (4,668) (2,389)
Interest Expense:
Deposits 66 (1,337) (1,271)
Borrowings (1) (114) (115)
Total Interest-Bearing Liabilities 65 (1,451) (1,386)
Change in Net Interest Income $ 2,214 $ (3,217) $ (1,003)
Provision for Loan Losses. The provision for loan losses was $4.0 million for the nine months ended September 30, 2020, compared to $550,000 for the nine months ended September 30, 2019. The pandemic resulted in a dramatic increase in unemployment and recessionary economic conditions in the current year. Based on evaluation of the macroeconomic conditions, the qualitative factors used in the allowance for loan loss analysis were increased at the onset of the pandemic, primarily related to economic trends and industry conditions, because of vulnerable industries such as hospitality, oil and gas, retail and restaurants and resulted in a $2.1 million provision in the first quarter. Macroeconomic conditions have improved as the economy continues to reopen from the second quarter pandemic-related shutdown and the qualitative factors have been further adjusted. However, as noted in the quarterly results, the Company has an exposure of hotel loans that have been greatly impacted by the COVID-19 pandemic and were evaluated for impairment in the current quarter. Two hotels with a total principal balance of $7.9 million were determined to be impaired due to insufficient cash flows and occupancy rates and was a driving factor in a $2.3 million increase in specific reserves in the third quarter. $16.1 million of hotel loans excluded from homogenous loan pools were evaluated for impairment and determined to not require specific reserves.
Net charge-offs were $87,000, or 0.01% net charge-offs to average loans on an annualized basis, for the nine months ended September 30, 2020. Net charge-offs were $358,000, or 0.05% net charge-offs to average loans on an annualized basis, for the nine months ended September 30, 2019. The increase in the prior year was driven by higher automobile loan charge-offs.
Noninterest Income. Noninterest income increased $448,000, or 7.2%, to $6.7 million for the nine months ended September 30, 2020, compared to $6.2 million million for the nine months ended September 30, 2019.
• Service fees decreased $203,000 to $1.6 million for the nine months ended September 30, 2020, compared to $1.8 million for the nine months ended September 30, 2019 due to decrease in overdraft fees and customer usage from the pandemic.
• Insurance commissions increased $256,000, or 8.0%, to $3.5 million for the nine months ended September 30, 2020, compared to $3.2 million for the nine months ended September 30, 2019 due to an increase in both commercial and personal line polices.
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• Net gain on sales of loans was $1.0 million for the nine months ended September 30, 2020 compared to $190,000 for the nine months ended September 30, 2019 primarily due to increased mortgage loan production from refinances, which were sold to reduce interest rate risk on lower yielding, long-term assets.
• Net gain on sales of investment securities was $489,000 for the nine months ended September 30, 2020 to harvest gains on higher-interest mortgage-backed securities that were paying down quicker than expected compared to a net loss of $50,000 for nine months ended September 30, 2019.
• The Company’s marketable equity securities, which are primarily comprised of bank stocks, reflected a decline in value of $469,000 for the current period primarily from the impact of COVID-19 on the banking industry.
• The Company recorded a $48,000 net loss on disposal of fixed assets in the current year primarily related to the sale of the former Exchange Underwriters headquarters.
• There was a $443,000 decrease in other (loss) income as a result of an increase in amortization on mortgage servicing rights combined with a $269,000 temporary impairment on mortgage servicing rights recognized in the current period due to a decline in the interest rate environment that caused increased prepayment speeds and resulted in a decrease in fair value of the serviced mortgage portfolio.
Noninterest Expense. Noninterest expense increased $21.1 million, or 81.4%, to $47.0 million for the nine months ended September 30, 2020 compared to $25.9 million for the nine months ended September 30, 2019. This was primarily impacted by goodwill impairment of $18.7 million and writedown on fixed assets of $884,000 as previously noted. Excluding the impact of these non-cash charges, noninterest expense increased $1.5 million, or 5.9%, to $27.5 million for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.
• Salaries and employee benefits increased $410,000 for the nine months ended September 30, 2020 compared to $14.3 million for the nine months ended September 30, 2019. The increase is related to the Community Bank Cares 10% premium pay during the pandemic. Additionally, the Company recognized approximately $388,000 of one-time payments related to the transition and retention of a permanent CEO for the nine months ended September 30, 2020 and restricted stock expense increased $91,000 in the current period related to grants in December 2019. This was partially offset by a $407,000 one-time payment that reduced employee benefits from health insurance claims exceeding our stop-loss limit for the 2019 plan year and change from a self-funded to a fully insured plan. Final calculation of the stop loss payment was completed 90 days after the end of the plan year. Also the Company benefited from deferred employee-related loan origination costs associated with PPP loans.
• Occupancy expense increased $172,000 to $2.2 million for the nine months ended September 30, 2020 compared to $2.0 million for the nine months ended September 30, 2019. The increase was primarily related to a one-time $84,000 early lease termination payment from the Bethlehem branch closure and increase in property management costs.
• Equipment expense decreased $146,000 to $701,000 for the nine months ended September 30, 2020 compared to $847,000 for the nine months ended September 30, 2019 as the result of decrease in depreciation and repairs and maintenance.
• Data processing increased $209,000 to $1.4 million for the nine months ended September 30, 2020 compared to $1.2 million for the nine months ended September 30, 2019 primarily due to technology investments.
• Contracted services increased $526,000 to $1.5 million for the nine months ended September 30, 2020 compared to $945,000 for the nine months ended September 30, 2019, primarily due to temporary employees hired to assist with PPP loan processing and consultants used to assist in infrastructure improvements. Total consulting fees in the current period associated with the search for a permanent CEO were $177,000.
• FDIC assessment expense increased $125,000 to $493,000 for the nine months ended September 30, 2020 compared to $368,000 for the nine months ended September 30, 2019 due to deposit insurance fund credits approved for banks with less than $10 billion in assets in the prior period.
• Legal fees and professional fees increased $109,000 to $567,000 for the nine months ended September 30, 2020 compared to $458,000 for the nine months ended September 30, 2019 due to fees associated with the transition and retention of a permanent CEO.
Income Tax Expense. Income tax expense decreased $1.7 million to $640,000 for the nine months ended September 30, 2020 compared to $2.3 million for the nine months ended September 30, 2019. While the goodwill impairment charge was non-tax deductible, income tax expense for the nine months ended September 30, 2020 was impacted by a $338,000 benefit related to the reversal of a deferred tax liability associated with goodwill. Due to goodwill being partially impaired, a proportional amount of the deferred tax liability was reversed.
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Off-Balance Sheet Arrangements.
Other than loan commitments and standby and performance letters of credit, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a significant current or future effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures, or capital resources that are material to investors. Refer to Note 9 in the Notes to Consolidated Financial Statements of this report for a summary of commitments outstanding as of September 30, 2020 and December 31, 2019.
Liquidity and Capital Management
Liquidity. Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Company’s primary sources of funds consist of deposit inflows, loan repayments and maturities, calls and sales of securities. While maturities and scheduled amortization of loans and securities are typically predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
The ability to predict the impact of the COVID-19 pandemic on the Company’s liquidity with any precision is difficult and depends on many factors beyond our control. The market area was one of the first to implement state-wide shelter-in-place orders and closing all but essential businesses and certain government restriction remain in effect. The far-reaching consequences of these actions and the crisis is unknown and will largely depend on the extent and length of the recession combined with how quickly the economy can fully re-open. As of September 30, 2020, 86% of loans that were in deferral at June 30, 2020 have returned to their regular payment schedule, but any additional forbearance that may be needed could significantly impact our sources of funds from loan cash flows.
The Company regularly adjusts its investments in liquid assets based upon its assessment of expected loan demand, expected deposit flows, yields available on interest-earning deposits and securities, and the objectives of its asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits with other banks and short- and intermediate-term securities. The Company believes that it had sufficient liquidity at September 30, 2020 to satisfy its short- and long-term liquidity needs.
The Company’s most liquid assets are cash and due from banks, which totaled $112.2 million at September 30, 2020. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. Unpledged securities, which provide an additional source of liquidity, totaled $26.6 million at September 30, 2020. In addition, at September 30, 2020, the Company had the ability to borrow up to $430.7 million from the FHLB of Pittsburgh, of which $416.9 million is available. The Company also has the ability to borrow up to $95.7 million million from the FRB through its Borrower-In-Custody line of credit agreement and the Company also maintains multiple line of credit arrangements with various unaffiliated banks totaling $60.0 million as of both September 30, 2020 and December 31, 2019.
At September 30, 2020, $86.6 million, or 44.1% of total time deposits mature within one year. If these time deposits do not remain with the Company, the Company will be required to seek other sources of funds. Depending on market conditions, the Company may be required to pay higher rates on such deposits or other borrowings than it currently pays on these certificates of deposit. The Company believes, however, based on past experience that a significant portion of its certificates of deposit will remain with it, either as certificates of deposit or as other deposit products. The Company has the ability to attract and retain deposits by adjusting the interest rates offered.
We are committed to maintaining a strong liquidity position; therefore, we monitor our liquidity position on a daily basis. We anticipate that we will have sufficient funds to meet our current funding commitments. The marginal cost of new funding, however, whether from deposits or borrowings from the FHLB, will be carefully considered as we monitor our liquidity needs. Therefore, in order to minimize our cost of funds, we may consider additional borrowings from the FHLB in the future.
CB Financial is a separate legal entity from the Bank and must provide for its own liquidity to pay any dividends to its shareholders and for other corporate purposes. Its primary source of liquidity is dividend payments it receives from the Bank. The Bank’s ability to pay dividends to CB Financial is subject to regulatory limitations. At September 30, 2020, CB Financial (on an unconsolidated, stand-alone basis) had liquid assets of $4.7 million. While the Company is not currently planning to reduce or suspend quarterly dividends, if the Company incurs or is expected to incur significant reduction in earnings as a result of the COVID-19 pandemic, it may need to suspend or reduce the level of quarterly dividends. In addition, primarily due to the COVID-19 pandemic and the expected impacts on the economy, on March 19, 2020, the Company announced that its stock repurchase program was suspended until further notice to preserve excess capital in support of the Bank’s business of providing financial services to its customers and communities. The ability to pay future dividends or conduct stock repurchases may be limited under applicable banking regulations and regulatory policies due to expected losses for future periods and/or the inability to upstream funds from the Bank to the Company as a result of lower income or regulatory capital levels.
Capital Management. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary
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actions by regulators that, if undertaken, could have a direct material effect on the Company's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, each must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Under the Regulatory Capital Rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier I capital above its minimum risk-based capital requirements in an amount greater than 2.5% of total risk-weighted assets.
At September 30, 2020 and December 31, 2019, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. At September 30, 2020, the Bank's capital ratios were not affected by loans modified in accordance with Section 4013 of the CARES Act. In addition, PPP loans received a zero-percent risk weight under the regulatory capital rules regardless of whether they were pledged as collateral to the Federal Reserve Bank's PPP lending facility, but were included in the Bank's leverage ratio requirement due to the Bank not pledging the loans as collateral to the PPP lending facility.
The following table presents the Bank’s regulatory capital amounts and ratios, as well as the minimum amounts and ratios required to be well capitalized as of the dates indicated.
September 30, 2020 December 31, 2019
Amount Ratio Amount Ratio
(Dollars in thousands)
Common Equity Tier 1 (to risk weighted assets)
Actual $ 106,494 11.62 % $ 101,703 11.43 %
For Capital Adequacy Purposes 41,234 4.50 40,050 4.50
To Be Well Capitalized 59,560 6.50 57,851 6.50
Tier 1 Capital (to risk weighted assets)
Actual 106,494 11.62 101,703 11.43
For Capital Adequacy Purposes 54,978 6.00 53,401 6.00
To Be Well Capitalized 73,304 8.00 71,201 8.00
Total Capital (to risk weighted assets)
Actual 117,976 12.88 111,570 12.54
For Capital Adequacy Purposes 73,304 8.00 71,201 8.00
To Be Well Capitalized 91,631 10.00 89,001 10.00
Tier 1 Leverage (to adjusted total assets)
Actual 106,494 7.63 101,703 7.85
For Capital Adequacy Purposes 55,830 4.00 51,838 4.00
To Be Well Capitalized 69,787 5.00 64,798 5.00
Item 3. Quantitative and Qualitative Disclosure about Market Risk.
General. The majority of the Company’s assets and liabilities are monetary in nature. Consequently, the Company’s most significant form of market risk is interest rate risk and a principal part of its business strategy is to manage interest rate risk by reducing the exposure of net interest income to changes in market interest rates. Accordingly, the Company’s Board has established an Asset/Liability Management Committee, which is responsible for evaluating the interest rate risk inherent in the Company’s assets and liabilities, for determining the level of risk that is appropriate given the Company’s business strategy, operating environment, capital, liquidity and performance objectives; and for managing this risk consistent with the guidelines approved by the Board. Senior management monitors the level of interest rate risk and the Asset/Liability Management Committee meets on a quarterly basis to review its asset/liability policies and position and interest rate risk position, and to discuss and implement interest rate risk strategies.
Economic Value of Equity . The Company monitors interest rate risk through the use of a simulation model that estimates the amounts by which the fair value of its assets and liabilities (its economic value of equity, or “EVE”) would change in the event of a range of assumed changes in market interest rates. The quarterly reports developed in the simulation model assist the Company
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in identifying, measuring, monitoring and controlling interest rate risk to ensure compliance within the Company’s policy guidelines.
The table below sets forth, as of September 30, 2020, the estimated changes in EVE that would result from the designated instantaneous changes in market interest rates. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
(Dollars in thousands)
Economic Value of Equity EVE as a Percent of Portfolio Value of Assets Earnings at Risk
Change in Interest Rates in Basis Points ("bp") Dollar Amount Dollar Change Percent Change NPV Ratio Change Dollar Amount Dollar Change Percent Change
+300 bp $ 143,389 $ 7,252 5.3 % 11.07 % 132 bp $ 45,995 $ 9,177 24.9 %
+200 bp 143,822 7,685 5.6 10.82 107 43,504 6,686 18.2 %
+100 bp 142,697 6,560 4.8 10.45 70 40,052 3,234 8.8 %
Flat 136,137 — — 9.75 — 36,818 — — %
-100 bp 140,703 4,566 3.4 9.97 22 34,449 (2,369) (6.4) %
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the EVE tables presented assume that the composition of the Company’s interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured, and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE tables provide an indication of the Company’s interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on EVE and will differ from actual results. EVE calculations also may not reflect the fair values of financial instruments. For example, changes in market interest rates can increase the fair values of the Company’s loans, deposits and borrowings.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.
Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to our management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.
(b) Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended September 30, 2020, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, claims seeking damages for improper collection procedures or misrepresentations, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any other pending legal proceedings that we believe would have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 and "Part II, Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, which could materially affect our business, financial condition or future results. The risks described in such Annual Report on Form 10-K and Form 10-Q are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The Company did not purchase any of its common stock during the three months ended September 30, 2020.
On November 20, 2019, the Company announced that the Board had approved a program commencing on November 25, 2019 to repurchase up to $5.0 million of the Company’s outstanding common stock, which was approximately 3.2% of outstanding common shares. On March 19, 2020, the Company announced that the stock repurchase program was suspended until further notice. As of March 19, 2020, the Company had repurchased 69,966 shares. This repurchase program is scheduled to expire on November 24, 2020.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits
3.1
3.2
31.1
31.2
32.1
32.2
101.0
The following materials for the quarter ended September 30, 2020, formatted in XBRL (Extensible Business Reporting Language); the (i) Consolidated Statement of Financial Condition, (ii) Consolidated Statement of (Loss) Income, (iii) Consolidated Statement of Comprehensive (Loss) Income, (iv) Consolidated Statement of Stockholders’ Equity, (v) Consolidated Statement of Cash Flows and (vi) Notes to the Unaudited Consolidated Financial Statements
104.0 Cover Page Interactive Data File (Embedded within Inline XBRL document)
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SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CB FINANCIAL SERVICES, INC.
(Registrant)
Date:
November 9, 2020 /s/ John H. Montgomery
John H. Montgomery
President and Chief Executive Officer
Date:
November 9, 2020
/s/ Jamie L. Prah
Jamie L. Prah
Executive Vice President and Chief Financial Officer
(Principal Financial Officer and Chief Accounting Officer)
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TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1. Summary Of Significant Accounting PoliciesNote 2. (loss) Earnings Per ShareNote 3. Investment SecuritiesNote 4. Loans and Allowance For Loan LossesNote 5. DepositsNote 6. Short-term BorrowingsNote 7. Other Borrowed FundsNote 8. Fair Value DisclosureNote 9. Commitments and Contingent LiabilitiesNote 10. LeasesNote 11. Other Noninterest ExpenseNote 12. Segment and Related InformationNote 13. Goodwill and Intangible AssetsNote 14. Stock Based CompensationItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosure About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits

Exhibits

3.1 Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to Registration Statement on Form S-4 filed on June 13, 2014 (File No. 333-196749)) 3.2 Bylaws, as amended (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on May 20, 2020) 31.1 Rule 13a-14(a) / 15d-14(a) Certification (Chief Executive Officer) 31.2 Rule 13a-14(a) / 15d-14(a) Certification (Chief Financial Officer) 32.1 Chief Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Chief Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002